What's the difference between "that" and "it"?

[amanda12]

I would be very grateful if you could answer what's the difference between "THAT" and "IT"?
I've been studying english for a long time but when a friend came up with this question,I couldn't answer adequately.
Any help will be appreciated!!!

[Tdol]

'It' is a pronoun, while 'that' can be a pronoun, adjective, adverb, conjunction, etc. You can say 'that book', but not 'it book'. When you use 'that' as a pronoun, you give a geographical sense of location that 'it' doesn't necessarily carry.

[teesa@melita.com]

I need to explain very clearly to an upper intermediate student the difference between It and That. Eg. You are wearing a t-shirt with The Beatles and student wants to say 'Oh, that's my favourite band' or 'It's my favourite band'. I would say 'that's' but I can't find a good enough reason for my choice - if there's one. Any suggestions why we should use one or the other, would be extremely welcome.