I remember seeing somewhere that Lubavitchers use Italian esrogim because of its mesorah. They say that Moshe Rabbienu used an Italian esrog and that's why they use it. What is the earliest source for the idea that Moshe Rabbeinu used an Italian esrog and where can I see it inside (please no hearsay)?
There is no explicit "early" source. Here is the Lubavitcher Rebbe quoting the tradition in a letter from 1957: http://hebrewbooks.org/pdfpager.aspx?req=15941&st=&pgnum=149
There are hints to this tradition from Rashi on Genesis 27 39 where Isaac blesses Esav:
And his father Isaac answered and said to him, 'Behold, your dwelling place shall be the fat places of the earth and of the dew of the heaven from above.'
Rashi quotes the Medrash Raba defining "fat places of the earth" as "Italy in the Greek Empire".
We assume the best place to obtain a beautiful esrog is from the "fat places of the earth".
For more exhaustive discussions on the subject (including the geographic aspect) here are some pointers: