The Little Mermaid has been confirmed to be set in the Mediterranean by the directors but I am trying to figure out if it is set in Italy or Greece. I have found some interesting resources that make a case for either. The first link advocates for Italy. The second link has a post by the fanpop user "elschcari714" who advocates for Greece. I am curious what you guys think though.
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Neither i think it is in Denmark.

Denmark is what I always thought and what the general internet seems to believe, but if it is in either of these options, then I would say Greece as Ariel's father is supposedly related to the Greek mythological gods.

The kingdom look more like greece than Danemark in my opinion this is only Hans Christian Anderson who is danish. The construction look more like southerm Europe and yeah triton is supposed to be the son of Poseidon so maybe greece and ariel's mother name is athena ? But we Can see french influence Also in the movie.

I've heard some people say Spain or Portugal?

^you are right that people mention those as well. I have added Spain to the poll if anyone wants to switch their vote. I did not add Portugal though because apparently it is not a Mediterranean country.

I also added France because parts of it count as Mediterranean and that fanpop link above has a good case for France. Apparently, there was a Disney event several years ago where one of the heads of Disney mentioned that many of their films take place in France and they mentioned The Little Mermaid as one of them.

I agree that I always thought it was Denmark though.