The Euro is the official currency in Italy. Notes are in denominations of 5, 10, 20, 50, 100, 200, 500. Coins are in denominations of 1, 2, 5, 10, 20, 50.
The best place to exchange money is through an ATM machine in Italy. Be sure to bring your pin number with you. You should also advise your bank or credit card company so that they don't freeze your account due to abnormal charges.