Gli is if the first letter of the following word begins with a vowel, z or s and a consonant. i is used if the first letter of the word is a consonant. This site explains it clearly: http://www.bbc.co.uk/languages/italian/language_notes/il.html
I was failed for putting "l'acqua" instead of simply "acqua" without the article - although I was under the impression that in Italian the article should always be used. Is anyone else having this issue?
I don't understand. Do you always put the definite article in front of the town in a sentence like this or can you omit it?