I've learned that abitare is the verb of where someone physically lives, like a house or a zoo and vivere is the verb that means to actually be alive. So abitare should be the one that counts...

I think it's because it would be "lo" as the definite article before a noun beginning with "z" - hence nello - see: http://www.uvm.edu/~cmazzoni/3grammatica/grammatica/prepositions.html