Origins
The word 'it' — the most common pronoun in English after 'I' — has a surprisingly long history that connects it to psychoanalytic terminology, Latin grammar, and the fundamental question of how languages handle gender.
It descends from Old English 'hit' (it), the neuter nominative and accusative form of the third-person pronoun, from Proto-Germanic *hit, from the PIE demonstrative stem *ḱe-/*ḱi- (this, here) with a neuter suffix *-d. The 'h' was gradually lost in Middle English when the word occurred in unstressed positions (which was most of the time), producing modern 'it.' Some Middle English dialects retained 'hit' into the fourteenth century, and dialectal 'hit' for 'it' survives in some Appalachian and Southern American speech to this day.
The Latin cognate is 'id' — the neuter singular of the demonstrative pronoun 'is, ea, id' (he, she, it). This Latin 'id' was borrowed directly into English via Sigmund Freud's psychoanalytic theory. Freud's original German term for the primitive, instinctual part of the psyche was 'das Es' — literally 'the It.' When his works were translated into English, the translator James Strachey rendered 'das Es' in Latin as 'the id,' following a convention of using Latin technical terms. So English 'it' and Freudian 'id' are cognates — the same PIE word that arrived in English through two different routes, Germanic and Latin.
Old English Period
The possessive form 'its' has an unexpectedly late history. Old English used 'his' as the neuter possessive (just as it was the masculine possessive), since Old English 'hit' was grammatically neuter, and 'his' served for both masculine and neuter. The form 'its' does not appear until the late sixteenth century, and Shakespeare used both 'his' and 'it' as neuter possessives — 'its' occurs only about ten times in the entire Shakespeare corpus. The King James Bible (1611) does not use 'its' at all. The apostrophe-free 'its' (as distinct from the contraction 'it is' = 'it's') was fully established only in the eighteenth century.
In Modern English, 'it' serves several functions beyond simple pronoun reference. Impersonal 'it' ('it is raining,' 'it seems likely') has no referent at all — it is a dummy subject required by English syntax, which does not allow subjectless sentences (unlike Latin 'pluit' or Spanish 'llueve,' which say 'rains' without any pronoun). Anticipatory 'it' ('it is important that you go') holds the subject position while the real subject clause follows. Cleft 'it' ('it was John who called') restructures the sentence for emphasis. These diverse functions make 'it' one of the most grammatically versatile words in English, far exceeding its basic role as a neuter pronoun.