Wow, that is a hefty rate being charged by your bank right there (as current published rate is 0.78). As ATM withdrawals will be from your account, you do need to ask your bank what the commission will be for each to get a better idea of the cost. And to increase the maximum amount per day you can take out.... some have limits of 200$, for example. Also make sure that you have the right PIN length to do ATM withdrawals overseas (4 or 5 digits as opposed to 6)
Personally, I would use credit cards as much as possible. From my own use, I see whether they be Visa or Mastercard, the end rate paid tends to be pretty close to what the published currency exchange rate is for that day, so the % paid in commission is quite low.
I would recommend using CREDIT CARDS for anything over 30 euros, including restaurants and lodgings. Keep the cash for the smaller expenses, such as at the cafe and gelato shops, small souvenirs (if you buy nice gifts, such as leather jackets or bags, use credit card). That reminds me: if you make large purchases (over 155 euro) at any ONE store, ask if you can get VAT refund from them (you can read more about that here, it isn't simple but might be worth it depending on how much you spend:
http://www.agenziadoganemonopoli.gov.it/wps/wcm/connect/Internet/ee/Citizen/VTA+Refund/)
In this way, you keep the times you need to get cash from ATM to a minimum ;-).