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The most commonly given advice for using direct thoughts seems to be to format them in italics. I am not really satisfied with that, however. I haven't seen this used anywhere (granted, I do not read contemporary fiction) and it feels strange to use italics for two purposes (the second one being putting stress on a word ). Even on stack exchange the italics are frowned upon in several answers.

My preference would be to just leave them unformatted, inserted into a paragraph of indirect thoughts/feelings of the same character. My question is, would this confuse you? eg. in the below (the last sentence is the direct thought of the heroine):

It wasn't his look that unsettled her, however. It was the realization that her anger had vanished, and that what was slowly taking over its place within her mind was fear. What have I done?

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The quoted passage is completely comprehensible; it's clear that the question is being asked by the character. The alternative would be absurd - the narrator making some kind of parenthetical commentary on her own narrative! Adult readers of serious fiction will not be even momentarily confused by your example.

The technique you're using is called 'free indirect style', and has been around for a long time, although it came to occur much more frequently in the heyday of the great realist novelists: Austen, Eliot, Tolstoy, Flaubert. It is not at all old-fashioned, however. It's very commonly used today by contemporary fiction writers.

The habit of italicising characters' thoughts should be left where it belongs, in the pre-New Wave history of science fiction, and cheap pulp fiction thrillers. Unless you are writing 'young adult' or juvenile fiction, I would strongly advise you to continue to avoid italics, punctuation or any other clunky markers to separate chracters' thoughts from the enclosing narrative.

  • Thank you, I didn't know about free indirect style before. Glad to hear you find the passage comprehensible. I think it also helps if the direct thought appears only at the beginning or at the end of the narrative paragraph. – Gwen Ives May 11 '15 at 14:05
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Actually I have gone through the contemporary English language fiction I own to research this a while ago in relation to another similar question here on Writers.SE. I cannot find that question at the moment, and do not know if I actually answered there, so I'll give what I found for the use of italics below.

Use italics for:

  • words in a foreign language

    The seeds of Taxus baccata are poisonous.
    The seeds of the European yew (Taxus baccata) is poisonous.

  • direct speech in a foreign language

    »¡A la puñeta!«
    (Gene Wolfe, Home Fires)

  • names of objects (e.g. space ships)

    ... the sails did their work in silence, urging the immense square-rigger Rani south.
    (Gene Wolfe, Home Fires)

  • utterances that are not verbal (e.g. telepathy, communication implant)

    »Right now, that's all I know, but we'll keep you informed as we can. That is all.«
    Weapons status? Van snapped across the shipnet to Lieutenant Michael.
    Tenty-one torps left, ser.
    Thanks Weapons.
    (L. E. Modesitt, Jr., The Ethos Effect)

  • voices heard from the distance

    Someone was shouting in the infirmary, his hoarse voice audible far down the corridor: »Hey! Hey! Anybody! Come here!«
    (Gene Wolfe, Home Fires)

  • voices from devices (e.g. telephone, computer or movie cinema screens)

    Skips mobile phone was vibrating. He took it out and flipped it open.
    Susan appeared in its small screen. »›Hell hath no fury like a woman scorned.‹ Do you remember saying that, Mr. Grison?«
    (Gene Wolfe, Home Fires)

  • text written on objects

    The note said: Come quickly!
    ACAB, was written on the wall.
    Opening the book, John read: Everyone has the right to freedom of opinion and expression, and suddenly he knew what he wanted to say.

    Note how the quotation from a book is here not made from a source (as in academic writing) but read from the physical object that the protagonist encounters.

Do not use italics

  • when a character is thinking:

    »We'd be able to [...] do what we pleased.«
    And not what your father tells you to, I thought to myself.
    (Kim Stanley Robinson, The Wild Shore)

    There are counter examples to this last rule, but they are rare (in my selection of books). The only example of italic thoughts I found was in Stephenie Meyer's Twilight, and only one instance – the other instances of thoughts in the same book are not in italics!

A note on punctuation

Italicise parentheses, quotation marks or parenthetical dashes only if all text enclosed by them is in italics. Do not italicise only one quotation mark or bracket, even if it is immediately preceded by an italic word.

Do not do:

This is a (wrong exemplum) and should be avoided!

In English, non-paired punctuation such as commas, colons, semicolons, question and quotation marks are italicised if they follow an italic word:

Is this a correct exemplum? You bet!

  • Oh! you're right. No, my bad, I answered that pre-caffeine. I'll delete my comment. :) – Lauren-Reinstate-Monica-Ipsum May 10 '15 at 19:05
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    @what, telekinesis involves moving things with your mind, there are seldom words involved unless you are moving a pen. I think you meant telepathy. – hildred May 11 '15 at 0:02
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I find thoughts inside speech quotes to be incredibly distracting, because I have to spend time figuring out if the person is thinking or talking. So don't do that, whatever punctuation you use for speech.

Leaving thoughts inline is okay if they're kind of passim narration of a sort:

She ducked around the corner, but the man had disappeared. Where could he have gone? He didn't have wings. She sighed, holstered her gun, and pulled out her phone to call it in.

If the character's thoughts are really dialogue, or a monologue, you do have to set it off. I personally prefer italics.

She ducked around the corner, but the man had disappeared. Dammit, where did he go? I just saw him! How could I have lost him in two seconds? She sighed, holstered her gun, and pulled out her phone to call it in.

In your example, What have I done? is her direct thought, so this needs to be set off somehow. If you didn't want to do that, you'd reword it as:

It wasn't his look that unsettled her, however. It was the realization that her anger had vanished, and that what was slowly taking over its place within her mind was fear. What had she done?

For non-vocal communication, I have seen italics with additional non-standard punctuation, like double colons. Mercedes Lackey uses this for telepathy.

He reached out to his Companion. ::Where are you, Hayburner?::
::Right here,:: Tantris answered.

Voices from a distances are still voices speaking, so I would put those in regular speech quotes. Voices from radio/TV can be either regular speech quotes or italics at your discretion.

If you're worried about overdoing italics because you're using them for telepathy and for thoughts, for example, then rework your passages with thoughts so they're more narration and less direct monologues.

In any case, using italics for emphasis is entirely fine, no matter what else you use italics for.

  • Did you mean "non-vocal communication" rather than "nonverbal utterances"? "Utterance" indicates speech (Google: "a spoken word, statement, or vocal sound") and "verbal" indicates words "relating to or in the form of words" (again, Google). – Paul A. Clayton May 11 '15 at 1:59
  • @PaulA.Clayton That would probably work better; I was copying @ what's structure because I was minorly disagreeing with how he'd phrased it. – Lauren-Reinstate-Monica-Ipsum May 11 '15 at 9:24
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I have seen direct speech enclosed in single inverted commas so that it looks like speech. For example:

Bill walked quickly down the street. 'I'm going to kill him,' he thought.

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    In American English, single quotation marks are used to quote something inside a set of double quotation marks. (She said, "Did he just say, 'I love Dave'?") I'm not aware that they're ever used for internal thoughts. – Ken Mohnkern May 12 '15 at 20:52

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