The Vatican City is the world's smallest country both by area and by population, and is the center of Catholicism. As a district of Rome, it encompasses the Vatican City State (Italian: Stato della Città del Vaticano; Latin: Status Civitatis Vaticanae), as well as the surrounding Roman neighborhoods of Borgo and Prati. St. Peter's Basilica, the Vatican Museums and the Sistine Chapel are all in Vatican City. This tiny country completely within Rome is packed with more history and artwork than most cities in the world, and indeed many countries.
The Vatican City is the temporal seat of the Pope, head of the worldwide Catholic Church. Situated within the city of Rome, the Vatican is the world's smallest sovereign state. You may also hear the term Holy See, which is used to refer to the Diocese of Rome—that is, the ecclesiastical and administrative authority of the Pope, rather than the sovereign governmental entity that is the Vatican City State.
Vatican City is all that remains of the Papal States, the former temporal land holdings of the Pope. Over the years, this territory varied considerably in extent, and may be traced back to AD 756 with the "Donation of Pepin". However, the popes had been the de facto rulers of Rome and the surrounding province since the fall of the Roman Empire and the retreat of Byzantine power in Italy.