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Domain names can only use letters, numbers, the fada character (acute accent) and hyphens (“-“). Spaces and other symbols are not permitted for use. Names cannot begin or end with a hyphen and are not case sensitive.
Technically William is right, and only letters, numbers and hyphen (-) are allowed in subdomains. However: in practice, you will see that underscore (_) will also work in all major browsers, but this is not guaranteed. Some providers and other services may not allow you to set it in DNS.
Hyphens in subdomains are just as acceptable as hyphens in domain names. One suggested drawback to hyphens in domain names is that having too many (with "too many" being more then two) it will cause your site to be put in the sandbox or face some other kind of penalty for "looking spammy".
Most answers given here are false. It is perfectly legal to have an underscore in a domain name. Let me quote the standard, RFC 2181, section 11, "Name syntax":
The DNS itself places only one restriction on the particular labels that can be used to identify resource records. That one restriction relates to the length of the label and the full name. [...] Implementations of the DNS protocols must not place any restrictions on the labels that can be used. In particular, DNS servers must not refuse to serve a zone because it contains labels that might not be acceptable to some DNS client programs.
See also the original DNS specification, RFC 1034, section 3.5 "Preferred name syntax" but read it carefully.
Domains with underscores are very common in the wild. Check _jabber._tcp.gmail.com or _sip._udp.apnic.net.
Other RFC mentioned here deal with different things. The original question was for domain names. If the question is for host names (or for URLs, which include a host name), then this is different, the relevant standard is RFC 1123, section 2.1 "Host Names and Numbers" which limits host names to letters-digits-hyphen.
One should be clear about definitions. As used here:
The hostname is subject to the restrictions of RFC 952 and the slight relaxation of RFC 1123
RFC 2181 makes clear that there is a difference between a domain name and a hostname:
...[the fact that] any binary label can have an MX record does not imply that any binary name can be used as the host part of an e-mail address...
So underscores in hostnames are a no-no, underscores in domain names are a-ok.
In practice, one may well see hostnames with underscores. As the Robustness Principle says: "Be conservative in what you send, liberal in what you accept".
In the 21st century, it turns out that hostnames as well as domain names may be internationalized! This means resorting to encodings in case of labels that contain characters that are outside the allowed set.
In particular, it allows one to encode the _ in hostnames (Update 2017-07: This is doubtful, see comments. The _ still cannot be used in hostnames. Indeed, it cannot even be used in internationalized labels.)
The first RFC for internationalization was RFC 3490 of March 2003, "Internationalizing Domain Names in Applications (IDNA)". Today, we have:
You may also want to check the Wikipedia Entry
RFC 5890 introduces the term LDH (Letter-Digit-Hypen) label for labels used in hostnames and says:
This is the classical label form used, albeit with some additional restrictions, in hostnames (RFC 952). Its syntax is identical to that described as the "preferred name syntax" in Section 3.5 of RFC 1034 as modified by RFC 1123. Briefly, it is a string consisting of ASCII letters, digits, and the hyphen with the further restriction that the hyphen cannot appear at the beginning or end of the string. Like all DNS labels, its total length must not exceed 63 octets.
Going back to simpler times, this Internet draft is an early proposal for hostname internationalization. Hostnames with international characters may be encoded using, for example, 'RACE' encoding.
The author of the 'RACE encoding' proposal notes:
According to RFC 1035, host parts must be case-insensitive, start and end with a letter or digit, and contain only letters, digits, and the hyphen character ("-"). This, of course, excludes any internationalized characters, as well as many other characters in the ASCII character repertoire. Further, domain name parts must be 63 octets or shorter in length.... All post-converted name parts that contain internationalized characters begin with the string "bq--". (...) The string "bq--" was chosen because it is extremely unlikely to exist in host parts before this specification was produced.
There is one additional thing you may need to know: If the host or subdomain part of the url contain an underscore, IE9 (have not tested other versions) cannot write cookies.
So be careful about that. :-)
Clarifying bortzmeyer and David Tonhofer, domain name and subdomain name labels can contain leading underscores, but nowhere else.
As David Tonhofer wrote, labels are the in-between-the-periods parts and should follow the LDH rule except when specifying service labels and port labels to differentiate them from regular labels. Then they must occur at the beginning of the label which should be the "Short Names" from the Service Name and Port Number Registry, the port number with no leading 0s, or the protocol (ie. tcp, udp). These service labels are further limited to 15 characters.
Contrary to David Tonhofer's answer, IDN does not allows for encoding underscore ('_' U+005F LOW LINE) or any other invalid ASCII character.
From RFC5890
[..] two new subsets of LDH labels are created by the introduction of IDNA. These are called Reserved LDH labels (R-LDH labels) and Non-Reserved LDH labels (NR-LDH labels). Reserved LDH labels, known as "tagged domain names" in some other contexts, have the property that they contain "--" in the third and fourth characters but which otherwise conform to LDH label rules.
Punycode encodes all ASCII codepoints as ASCII directly, including underscore. The resulting R-LDH would not conform the the LDH label rules. For example, Σ_.com would be encoded as xn--_-zmb.com which violates the rules. There may be a homographic codepoint which looks like an underscore that can be coded legally (perhaps '＿' U+FF3F fullwidth low line), but these kinds of codepoints would be categorized as DISALLOWED by RFC5892 under 2.3 IgnorableProperties as a Noncharacter_Code_Point.
RACE (the other proposed IDN encoding scheme) was not accepted as a standard by IETF and should not be used.
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