Is it wrong to put something you quote inline in italics, like such:

Peter said "I am Peter" at the convention.

Is "I am Peter" italic, or can it be (optional), or should it never
be? If it makes a difference than US-English please.

Thank you very much for accepting my remarks as your answer. It's
always a pleasure to be able to help a Google Answers colleague.

As I have mentioned, italics appear within quotes rather seldom in
English text. They may be used to indicate non-English words, or to
provide emphasis, as if the speaker is shouting. Another instance in
which italics would be used within quotes would be when the title of a
literary work is mentioned:

Peter said "Have you ever read A Man Called Peter? I am Peter" at the convention.

In the sentence above, "A Man Called Peter" would be italicized, since
it is the title of a book.

Generally, if what you have is an ordinary quote without non-English
words or special vocal indications (such as shouting or an emphatic
whisper), you can choose between using quotation marks (which is the
standard) or using italics (which is more "artistic," and often done
in stream-of-consciousness passages in fiction). Using both quotation
marks and italics is, with the exceptions I've noted, overkill.

"Italics may read as a sort of insistent whisper, or a thought, or a
quote, or handwriting. Italics have a broad range of usages; people
may shout or mutter in italics, and the reader has no trouble
discerning which. Foreign words are customarily italicized. Italics
are words set apart, words occurring outside the basic venue of spoken
conversation, or inexpressible things forced into language."

Ambiguous.org: The Syntax of Links
http://www.ambiguous.org/robin/opinion/linksyntax.html 

Best regards,
Pink

Using italics between quotes isn't usually done in English. "I am
Peter," in your sentence above, might conceivably be italicized if you
wanted to indicate that Peter was shouting. This would be similar to
the use of all-caps in email and online communication.

Some authors (Stephen King springs to ming) use italics to indicate
characters' thoughts. But the use of quotes and italics together is
something rarely seen.

I have made a typographical error in my comment above. For "Stephen
King springs to ming," please read "Stephen King sprinds to mind."
Ming has nothing to do with it (unless Stephen King is a Flash Gordon
fan).

In addition to indicating shouting, italics can be used within a quote
that contains non-English words.

Peter said "Sacre bleu! I am Peter" at the convention.

Here you would italicize "Sacre bleu," but leave "I am Peter" in normal text.

Well thanks except I think you belong to the answer spot with that :)

Pink's observation that it is rarely done is accurate.  However,
authors, especially authors of fiction aned poetry, do all kinds of
idiosyncratic things with typography, sometimes to achieve special
effects, and sometimes just to create a distinctive look or style. 
Use of italics in such a way would be nonstandard, but not *wrong* in
the sense of being utterly indefensible and never justified.

It seemed to me that you might have been asking whether you could use
italics *instead* if quotation marks.  This too would be nonstandard
practice and would normally be avoided, but a case could probably be
made for it in special circumstances.

There are two considerations you might want to think about, though. 
One is that italics are harder to read than roman (plain) type and
tiring for the eye.  Frequent or heavy use can get annoying.  The
other is that to the extent that typographical conventions support
meaning, departure from standard use can work against effective
communication.

Archae0pteryx
(a publications professional, but not a researcher)

Please pardon the typo in "and."  Being unable to edit an entry after
posting is a sometimes vexing limitation.