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1. At the outset, both UK and Italian law allow you to possess dual citizenship. Accordingly, it is perfectly lawful for you to apply for UK citizenship and to retain your Italian citizenship. You can then hold a passport of both countries and use whatever passport is more appropriate when the occasion demands it. Secondly, both yourself and your husband can obtain UK citizenship based on five years lawful residence in the UK. However, it is necessary that you hold a UK residence card for one year prior to obtaining citizenship as it is necessary to show that you were living for one year visa free in the UK before you apply for UK citizenship. You can prove you were visa free, by other means, but a residence card is the usual method. So you should immediately apply for a residence card if you wish to pursue this option.
2. Ancestry rights are not really relevant when applying for citizenship. There is no automatice entitlement to UK citizenship merely because you have a UK grandparent. It merely gives you a right to a visa to live in the UK. So, as you already qualify on the basis of your long residence, the fact you had a UK grandparent does not assist you any further.
3. Here is a link to how to apply for a Permanent Residence card https://www.gov.uk/apply-for-a-uk-residence-card/permanent-residence-card. Be aware that this is the first step you need to take in order to apply for citizenship. It is only 12 months after having a permanent residence card or certificate that you can then apply for UK citizenship.
4. Here is a general overview on becoming A UK citizen from the UK Government website https://www.gov.uk/becoming-a-british-citizen/check-if-you-can-apply. This can guide you on issues such as the Life in the UK Test which you will need to pass in order to become a UK citizen. The fee for each of you is £1236. So each of you will have to pay this fee when you make your naturalisation application for citizenship in a year's time.
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