I'm a NYCer too. I also live near The Yarn Company and I love it. It's not so much the prices, it's the people there. The owners, Julie and Jordana are both terrific and everyone on staff is so helpful, especially Nikki and Petra. Petra is an extraordinary knitter! I think she can knit in her sleep! Nikki is so kind and has a real eye for color. Every time I've asked for a recommendation, I'm very pleased with the results. They always take the time to answer questions and help with your knitting. They even go up and down the stairs to help me bring up my baby and stroller! So, I love them. The prices may be a little high, but they only use natural and really cool yarns. They also make some very nice patterns. Here is their website: http://yarnco.com/
On some yarns, YarnCo has the same price or even cheaper than Seaport Yarns. Seaport Yarns is also great. Also a very friendly and helpful staff. Their extra yarn return policy is not great though. You have to return any unused yarn within 30 days -- not a great policy if you're making a big project. But they are so nice! Here is their website: http://www.seaportyarn.com/
I've never been, but my friend says that School Products Co, Inc is the ultimate yarn-lovers' mecca. It has amazing specialty yarns left over from local designers. It's supposed to have awesome yarns at very good prices. Here is their website: http://schoolproducts.com/content.html
As for good Italian food, in my 'hood (the Upper West Side) we have a terrific restaurant named Gennaro 212/665-5348 . Delish!
Good luck to you and have fun!