That is a question all foreigners ask themselves. The most common translation for prego is "You are welcome" or "No problem". However, Italians use it in plenty of different ways. If you want here there is a video that well explain the way Italians use this word. https://www.youtube.com/watch?v=SOoFAuTms34

it's also the word you use when you pass sth. to so. e.g. if a person at the table reachs the cheese to you, he will say "Prego!" as for "here you are!". You can reply with "Grazie!". Here you can see that prego and grazie always stick together, (also inverted in the sequence) the one of the reply to the other.

in Portuguese is diferent ... when you use hammer you need "prego" for to hammer.

"Prego" (I pray), usually means something like, "you're welcome", as a response to "Grazie". It can also be used, at times, the way we might say "please" in English, with the meaning "I beg of you" (Think Shakespeare). It can be said to someone when politely inviting them to do something like to enter a room before yourself. "I beg of you (to come in and take a seat)". "Prego!"

"prego" is the first person singular present indicative of the verb 'pregare' = Pray - beg - ask It's also the way people reply to "grazie" (thank you) = you're welcome - don't mention it. source: http://answers.yahoo.com/question/index?qid=20070918164554AAai2EY