The Vatican has been headed by Pope Benedict XVI since Pope John Paul II died in 2005 after a 26-year pontificate.
Pope John Paul II was in office at a time of tremendous upheaval in Eastern Europe, including his homeland of Poland.
He preached dialogue and reconciliation, between former political opponents and also between different religions. During a visit to Israel the Pope expressed sorrow for the history of anti-Semitism within the Catholic church.
He also sought to heal rifts with other churches within the Christian faith. Some of these moves have been successful, others less so.
But critics accused the Vatican's social policy of being out-of-step with modern reality.
They said Pope John Paul's strict conservative teaching on issues such as abortion and contraception - both of which he absolutely rejected - failed a sizeable majority of Catholics worldwide. They argued that his views disqualified the church from having any role in solutions to the problems facing hundreds of millions of believers.
The Vatican City packs imposing buildings into its small area. These include St Peter's Basilica. Completed in the early 17th century, the domed edifice is a pilgrimage site. The Vatican Museums and Art Galleries house the art collections of the popes.
In 2010 the Vatican moved to meet international demands for more financial transparency following an investigation into the Vatican bank for violation of money-laundering rules. It put in place laws that bring it in line with international standards on transparency, prevention of terrorism, counterfeiting and fraud.
Head of state: Pope Benedict XVI
Formerly Cardinal Joseph Ratzinger, Benedict XVI was elected pope in April 2005.
Already one of the Vatican's most powerful men, he presided over the funeral of his predecessor Pope John Paul II and was said to be among the late pontiff's closest friends.
Pope Benedict was born in Bavaria in 1927 and is the oldest man to become pope in more than 100 years. He is the first German pope since the eleventh century.
Drafted into the German armed forces during World War II, he deserted as it drew to a close and was a prisoner of war in 1945. He has said that the brutality of the Nazis later helped lead him to the priesthood, and in one of his first papal addresses he condemned the Holocaust.
He became cardinal-archbishop of Munich in 1977, and in 1981 the new Pope John Paul II appointed him head of the Congregation of the Doctrine of the Faith.
In this office, the successor to the historical Inquisition, Cardinal Ratzinger set out his conservative intellectual stance, including rigorously uncompromising views on birth control, sexuality and euthanasia.
Pope Benedict has not adapted to the public limelight as easily as his predecessor, and a number of controversies have resulted from his uncertain handling of the media.
His decision to readmit Richard Williamson, an ultraconservative bishop and Holocaust denier, to the Church angered Jews and many loyal Catholics, and his quotation of comments by a Byzantine emperor highly critical of the Muslim Prophet Muhammad provoked protests by Muslim clerics and public figures.
Both these controversies were eclipsed by the coming to light of numerous sex abuse scandals involving Catholic clergy throughout the world. The Vatican dismissed claims that the Holy See had attempted to hush up accusations of clerical paedophilia rather than take action to stop the abuse as an "ignoble" attack on the Pope.
Powerful transmitters beam Vatican Radio - "The Pope's Voice" - to a global audience. But the station has faced allegations that its transmissions have been putting lives at risk in a Rome suburb by exceeding Italy's electromagnetic radiation standards - claims the Vatican denies.
There were 480 internet users by August 2010, according to Internetworldstats.com.