"Włochy" is pronounced "vuohy" and the "y" at the end of the word sounds like the "i" in the word "sit."
"Włochy" means "Italy," so yes, it does replace the word for Italy in English.
The word "Włochy" (Italy) or "Włosi" (Italians) actually derives from the word "wołoch," which is an old Slavic word that means the same as "stranger" or "alien." I believe the word actually dates back to the late 1300s, when the Roman Empire occupied a region of modern Romania that was then called Wołoszczyzna, which was home to Wołosi (different ethnic groups/tribes living in the Balkans). The Romans in Wołoszczyzna were able to withstand a flood of Slavic tribes that settled around the Balkan peninsula during this time, and the Slavs probably began to refer to them as "wołochy," calling them after the name of the territory.
So basically, the old word that "Włochy" is derived from means "stranger." This should actually make a lot of sense when you think about it because the Italians weren't the only nation Poland came to refer to as "strangers." The word for "Germany" and "Germans" is "Niemcy," which comes from the words "nie + my," meaning "not us."
Hope this helps!
Polish is my first language.