In Italian, the country is known as Stato della Città del Vaticano, which litterally translates to State of the Vatican City, and the landlocked sovereign state lies within a walled enclave in the city of Rome, Italy's capital.
It was established in 1929 by the Lateran Treaty, which was signed by Cardinal Secretary of State Pietro Gasparri on behalf of the Holy See and by then Prime Minister Benito Mussolini on behalf of the Kingdom of Italy. However, Vatican City is distinct from the Holy See, which dates back to the early eras of Christianity and is seen as the main episcopal see of approximately 1.2 billion Latin and Eastern Catholic followers around the world.
Other distinctions lie in the fact that official ordinances of Vatican City are issued in Italian, whereas official documentation of the Holy City is usually published in the more traditional Latin format. The two entities also have distinctly different passports: The Holy See offering only service and diplomatic passports as it is not technically a country, while the Vatican issues standard 'normal' passports. However, in either case very few passports are ever issued in the first place.
When established in 1929, the Lateran Treaty spoke of the city as a new creation, and not as a vestige of the much larger Papal States the previously encompassed much of Italy. Most of this previously encompassed territory was absorbed into the Kingdom of Italy around the time of 1860, and the final piece of the puzzle (the city of Rome with Lazio) was absorbed ten years later in 1870.
Vatican City is an ecclesiastical or sacerdotal monarchical state, overseen by the Bishop of Rome - the Pope. The highest state functionaries are all Catholic clergymen of various national origins. It is the location of the Pope's residence, which is officially termed as the Apostolic Palace.
Popes have generally resided within the same area that was eventually recognized as a sovereign state in 1929 became Vatican City, but they have also resided in the Quirinal Palace in Rome and elsewhere at times.