Some pet linguistic peeves are indulged, I find, not for reasons of clarity or grammatical soundness, but out of petty pedantry, habitual curmudgeonliness, or some kind of character disorder. On the other hand, I've been accused – affectionately, I hope – of excessive tolerance in such matters. But I have peeves of my own, one of which is the confusion over its and it's.
Lynne Truss considers this "the greatest solecism in the world of punctuation". In Eats, Shoots & Leaves she writes that it "sets off a simple Pavlovian 'kill' response in the average stickler," and goes on to fantasize – satirically, one hopes – about lightning strikes, hacking, and unmarked graves.
My instincts are less violently judgemental. I don't get wound up over its/it's confusion – but I often wince at it, particularly when it appears in edited prose. So, I imagine, does Roger Ebert:

To summarize the difference: it's is always a contraction of it is or it has. Usually the former. Keep this front and centre, and you'll greatly reduce your chances of ever getting it wrong. Its is the possessive form of it – more fully, the third person neuter possessive pronoun. So you might write of a solitary ant: "It's lost its way."
It's not just students, bloggers and learners who mix up its and it's, but also people for whom words are central to their trade – journalists, broadcasters, reviewers, professors of law, and so on. I even saw a lexicographer slip up. Evidently it's a major source of confusion – a mistake so common as to be virtually normalised. But I'm an editor with a hero-of-Haarlem complex, so I feel duty bound to do what I can. Lawrence Lessig almost put it well:

A look at the causes might shed some light. There are, I suspect, three main reasons for the confusion. One is that its is an exception to a well-known rule: Add apostrophe-s for possession. Hence the ill-advised leap from, say, the dog's tail to *it's tail. Another reason is contagion: the mistaken forms are very prevalent, and their every appearance reinforces the wrongness. The third main reason is that many people don't care.
Apparently, iPhones auto-correct its to it's, which might explain Mr Lessig's lapse. A friend on Twitter thinks this faulty auto-correct feature is responsible for a fair proportion of the confusion on Twitter. She's probably right. It's also worth noting that its and it's have quite a tangled history.
Maybe you'd consider its/it's confusion a negligible matter – the pet rock of pet peeves. It rarely leads to misinterpretation, and it sure doesn't amount to much on a cosmic scale. But careful readers will notice the mistake and consider it a sign of inattention, sloppiness, ignorance, or even illiteracy – especially if it's repeated. So if you value good communication, it's a distinction you ought to make, and make consistently.
That its/it's mistakes occur in the prose of reputable publications and careful writers shows how easily confusion creeps in. But with vigilance and application we can defend ourselves from it. If you're prone to this mix-up, even occasionally, you might want to condition yourself to observe the distinction. Here's a way. For as long as I can remember, I've habitually read erroneous it's as it is. So, for example, in The Guardian recently I saw the following:

I automatically read this as "in all it is bewildering glory," with a slight slow emphasis on "it is". The same goes for these errors on the HSE and Galway City Council websites:

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Semantically, I inferred what was meant, but in parallel I processed the absurdities ("it is companion book"; "it is environs"). Doing this for years has given me a kind of immunity, I think, by steadily and deeply embedding the rule in my nervous system. I'm very strongly sensitised to it. Accepting it's as its would undermine this conditioning, so I don't.


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Comments from our users:
Thank you
One year, the gift was a reusable, plastic water bottle, boldly imprinted with the words "Union Middle School appreciates it's teachers." Many of us cringed when we saw the mistake; of all institutions, surely a school should use words properly! How embarrassing!
No one was more appalled than the chairman of the English department, who had been on the committee that ordered the bottles. She had written the message correctly (the school "appreciates its teachers"), and the bottle company thought it was wrong and "fixed" it for us! Gggrrr!
Joyce: Yes, I believe Ebert deliberately omitted the apostrophe from that's. Relying on automated spell-check and grammar-check programs is a bad idea; Grammarphobia recently showed some of the latter's shortcomings. I wouldn't worry about them taking over the world unless they up their game!
As for getting rid of apostrophes: I don't know. I find it useful in some cases. It's a pity it proves so difficult for many people to master. Robert Burchfield thought the mark might soon be abandoned, but I can't see this happening in the foreseeable future. I've written a little more about it at the end of this blog post.
Kristine: Oh no! How annoying that must have been, and how presumptuous of the bottle company to overrule the committee. At the very least, they ought to have checked before taking such a step — find a reference book, for example, or make a simple phone call. I imagine the error left a bad taste in many mouths.
Winston: You're right in your assertion that many people just don't seem to understand contractions. I think contagion plays a part here: the more frequently people see a particular mistake, the more likely they are to make it themselves, unless they're unusually careful writers.
It is certainly possible to omit contractions in both writing and speaking. In fact, generally speaking, it is considered more formal to communicate without contractions especially in writing. In high school and college there are many educators who prohibit the use of contractions in scholastic writing. This is all of course based on what I recollect and believe, and my own insignificance endangers the credibility of my words. I am on your side though :-).
speck
James: I haven't investigated the relative frequencies of its->it's and it's->its; though I focused on the former, I hope I implied both, since they seem so entangled. Hypercorrection is, as you suggest, probably responsible for some it's->its errors. The lack of an apostrofly makes it less annoying to me than its->it's, though it's equally wrong.
Anonymous: The credibility of your words rests principally on the credibility of your words! I've noticed that my blog contains more contractions now than it did in its early days, when I overestimated the importance of formality. Sometimes the full forms are more appropriate — e.g., for emphasis — but I find that contractions make my prose friendlier.
"It's is not, it isn't ain't and it's it's, not its, if you mean it is. If you don't, it's its. Then too, it's hers. It isn't her's. It isn't our's either. It's ours, and likewise yours and theirs."
While its/it's is so common, there is another contraction that very commonly mis-written---it's particularly common where the writer wants to convey an illiterate speaker: "would of" and its variants, as in "He would of gone home after school." The formal version is "would have" which should be written "would've." Another example that Winston is correct: people don't understand how to write contractions.
Karen: You're very welcome, and thank you for your kind comment. Sometimes I wish I could ignore the confusion over its and it's, but it seldom fails to bug me!
David: Thank you, that's a handy summary — though it omits it has.
catwalker: You might enjoy the aforelinked story of the apostrophe too. It's quite a tale. And yes, "would of" (and "could of", etc.) are all too common in writing.
Another research paper that might be of interest to apostrophe fans is
Odile Piton and Hélène Pignot's illustrated "Peregrinations of an apostrophe in 17th Century English", available in PDF format here.