At one time the Swiss were regarded as the best and most trustworthy mercenary soldiers you could hire, the Popes started using them and the tradition of the Swiss Guard started. Just where they are recruited from today I dont know
Vatican City may be "in" Rome,but it is city state of it's own,and has it's own laws within it.
The Italian Government has no jusidiction within Vatican City,the ruler of which (surprise,surprise) id the Pope.
They are still recruited from Switzerland.
http://en.wikipedia.org/wiki/Swiss_Guard