The reason traditionally given for "its" being exceptional among possessives in its lack of an apostrophe is that the English language (God bless her and all who sail in her) used to follow simpler rules.
1) "Its" means "belonging to it, and is the only way to form a possessive.
2) Apostrophes are used for contraction only.
Thus the original formation of "the dog's claws" would have been "the dog its claws." The "it" in the middle gets dropped, leaving an apostrophe instead. Writing "it's claws" would be equivalent to "it its claws," and hence erroneous.

Unfortunately, this explanation isn't true. It's pretty neat, though.