In case anyone missed it, I just spent 10 days in Italy, and I did a ton of research before going about using my iPhone over there. It was hard to piece everything together. Here's my own experience. In a nutshell, unless you put the iPhone in airplane mode and resign yourself to being cut off for the time you're there, it costs big bucks to use the iPhone overseas. Digest that, and then read on for ways to minimize the pain.
Wifi has not caught on in Italy (at least not widely available free Wifi). In big cities they charge you big-time for Wifi; either the hotel will gouge you or ristorantes and cafes will increase the table charge for giving you the password. The exception to this is Florence, where Wifi is US-like in availability and freeness. My hotel in Rome charged 22 Euro per day for high-speed unlimited Wifi, and that turned out to be the cheapest way to get it considering that otherwise I'd pay 7 or 8 Euro for an hour of iffy access in a cafe after buying a cappuccino and paying the table charge.
Data plans are therefore the way to go. I choked at the price of International data roaming, but I shelled out the $120 for 100 MB before I left; with the scarcity and expense of Wifi, this is the cheaper way to go if you want connectivity (I did).
Coverage was excellent everywhere we went, even in the middle of nowhere. I had four bars and at least an Edge and often 3G data signal. It costs a fortune to make International calls even if you buy a plan, so I didn't and left threatening messages on my Google Voice voicemail indicating I was out of the country and would pay through the nose if anyone called my iPhone. Then I forwarded everything unconditionally to Google Voice (AT&T charges you something like $1.50 if your phone RINGS overseas, whether you answer it or not) and had the voicemails e-mailed to me. I e-mailed people back if it was important. So the data plan pretty much covered everything.
On the coverage topic: I traveled with several Droid users, who smugly displayed their phones to me in the US and bragged about how they were iPhone killers. Unfortunately for them, they had no signal anywhere in Italy, so they wasted their International plans and had to rely on Wifi, which as I've said was brutal. I tried not to be too smug.
I didn't do much texting because everyone knew I was gone and feared charges on their phones. Turns out US phones aren't charged for sending to other US numbers even if the receiving phone is overseas, and if you have an unlimited texting option you can RECEIVE unlimited texts for free in Italy. To send them costs you money---$0.50 for SMS and more for MMS. I have a jailbroken phone and bought a small ($10) BiteSMS package which reduced my sent SMS costs to $0.08 per message. It was worth it to me because I communicate through SMS more than e-mail. (Note: sending texts via BiteSMS uses data.)
The GPS alone may be worth the data plan. I did not consider this, but once there I realized I would have been seriously crippled without Google Maps. It bailed me out of twisted Rome alleys multiple times. The walking directions were usually correct, and when they weren't the moving blue dot led me spot-on to where I needed to get. Rome maps are worthless in my experience. I think they print them to make fun of watching Americans trying to use them.
And since you're using data and GPS, you might as well use Foursquare tips. I used Gowalla because I watched to collect the stamps, but I used Foursquare for the utility. I found bathrooms and restaurants with Foursquare tips (in Italy, you cannot find a bathroom to save your life, and when you do it's disgusting, the lines are long, and you have to pay---usually with exact change---so there are a lot of Foursquare tips over there involving locations of free and/or clean WCs). I also found the only non-Italian restaurant in Rome (an Indian place) with Foursquare. Sometimes one tires of pizza and pasta and wants a good curry. With Foursquare and Google Maps, I found chickpea masala.
People told me that Italians all speak English, so I purchased the Lingolook Italy iPhone app and paged through it on the plane going over. It was the most highly recommended. I didn't find that the Italians DID all speak English (at least not when I deviated off the tourist tracks), so the app flagged in utility pretty quickly. I found a paper dictionary for a few Euros and used that way more. If I go to Italy again, I'll spend some quality time actually learning Italian from a book first. I ended up using a combination of English, Italian, French, and German to find some mutual language and got along that way, but it was suboptimal.
That's all I can think of. I hope it was helpful.