It is confusing, but so is ie English in the case of grandparents, there is no way of knowing whether grandfather is the father of your father or your mother (in Swedish they have different names; farfar and morfar), the same is true for your aunts and uncles (Swedish; faster/moster, farbror/morbror) so just because you happen to distinguish between nephew and niece (Swedish; systerson/brorson) you should be familliar with this confusion, whereas we Swedes ( and some other languages) are not. But you don't hear us complaining, not even as we learn English ;)
Good point! I guess in some cases it derives from cultural significance (or lack thereof) of being an older or younger brother or sister...but probably most times just an accident of the way the language developed. I have always found both examples (in English and in Italian) confusing!
That is not quite correct. In English, if it is necessary to differenciate between the father's or the mother's parents, we say "paternal grandfather/mother, or maternal grandfather/mother. I know it comprises two words, but that's because they aren't joined together as they are in Swedish, ie. father's father = far's far = farfar, or, brother's son = bror's son = brorson. The same applies for uncles and aunts. You will rarely hear it though, and as i mentioned before, only if the need to differenciate arrises.
Nope, nipote is both niece and nephew. The only way to clarify is to say "il nipote" which is nephew because it "il" is a masculine article and likewise "la nipote" means niece due to "la" being the feminine article. Nipoti is indistinguishable unless you somehow further specify that they are either boys or girls, i.e. grandsons vs. granddaughters. BUT it is again also used for plural nieces or nephews in which case you have to distinguish again. Like others have stated, it's confusing but it's part of what makes the language interesting! If I'm not correct with this, someone please correct me :)