Actually, it's a little beyond just being a dialect. Since Sicily was invaded by so many cultures, the language there took a life of its own and some linguists feel it's different enough to actually be a language of its own.

As far as your original question, Michael doesn't speak Sicilian very well, as you can see when he becomes frustrated at the meeting with Sollozzo when he can't find the right words and starts to speak English. I also agree with Turnbull that having the translator gave him a sense of authority with Appollonia's father. However, he spent a long time in Sicily and I would imagine his skill of the language would've improved, as evidenced in the scene with Mama in GF2.