I've heard a-lot about when "not" to use italics, and that they do have a function in writing. What is that function? Please be specific.
The majority of your questions here are better answered by purcahsing and reading a good grammar/style guide or two. Strunk and Whiote's The Elements of Style is compact and full of practical advice for most fictyion writers' everyday questions. Books like The Scott Foresman Handbook for Writers and The Little, Brown Handbook cover punctuation, grammar, and punctuation issues in more detail and with more examples. I also like The Chicago Manual of Style for extremely detailed answers not addressed by the other texts, even though its focus is more on journalism than fiction. Why ask for and filter through secondhand information when you can go directly to the recognised authorities on the subject? I'm happy to answer one or two such questions, and even look them up when necessary, but really, the number of these questions you pose are better addressed by doing some traditional research.
Cog's right concerning using resource materials to answer specific questions. You'll probably find that italics are largely a stylistic choice about which various publishers have very particular preferences. Other than that, italics do signal particular kinds of things (although a given writer might easily overuse them to the point of distracting his readers). Aside from style matters that require italics, a writer should avoid using them as a crutch to emphasize something where better writing could eliminate the necessity for italics altogether. But, especially in fiction, an author might very well have a good reason to use them that someone else might dispute as a completely unnecessary overusage. I've seen them used effectively (and ineffectively IMO) in published works. The most effective use I can recall was in one of Toni Morrison's novels (I believe it was LOVE) in which a disembodied (literary) "voice" occasionally provided a mysterious backstory--all "spoken" in italics. As I recall, I thought she did a fantastic job of interjecting this exceptionally interesting voice into the story she told, but I wouldn't expect her excellent choice to be replicated by someone who didn't have an awfully good reason and a good-sized stash of writing and storytelling skills. There was a book I read (might have been Ablom's TUESDAYS WITH MORRIE, but I can't find it right this minute to check). Every other chapter was printed in italics for no reason I could figure out at all, and I found it really annoying. It felt like a juvenile (very unwriterly) typesetting gimmick to me. You'll find if you research italics in some of the resources Cognito mentioned that they're often used for book titles and foreign language terms, sometimes for inner thoughts and particular kinds of emphasis. But there are way too many possible uses to mention (and to debate). If you read a lot, you'll begin to detect where and how authors use them in fiction (or whatever else you read). Then, when it feels like something you might want to try and you have a reason to find out if it'll work, you may discover there's nothing stopping you except (importantly) what it does to your reader's take on your story.
The answer to this one is also a question of who you are writing for, and how it feels to you. Don't do it for no reason, make sure the reader knows and understands why and when you use them, and stick to the pattern you chose. If you are writing for a publisher, I hear they can be pedantic about the use of italics - but I have read plenty of stories that used them quite effectively also, for various reasons.
Among the correct uses of italics: 1. A foreign word or phrase within an English sentence: 2. Placing an emphasis on a word withn a sentence that world not normally be stressed by the sentences structure: 3. The title of a book, performance, or musical piece: Also note that there is a convention for manuscripts that underlining is used to denote italicized text, although most publishers will probably accept italics directly rendered in manuscript. Don't expect underlined text to be treated as distinct from italics. In spite of what you may hear, there are specific rules for the use of italics. As a writer, you should learn them, and not just throw them around like texters use emoticons.
If for some reason you don't have access to a grammar book, here is a nice website. Check this page for italics.
anyone wanting to be a writer should have both a strunk and white and a good punctuation guide handy at all times, along with a good dictionary... those are to a writer, what measuring tape, square and plumb bob are to a carpenter... i put links to the online ones i use in a sticky that you'll find at the top of this section's thread list...