How to typeset greek letters

use xelatex or lualatex. Then it is really simple:

\documentclass[12pt]{article}
\usepackage{fontspec}
\setmainfont{DejaVu Serif}

\begin{document}

foo φύσις  bar 

\end{document}

If you just need a few words, then a simple approach can solve your problem:

\documentclass{article}
\usepackage[LGR,T1]{fontenc}
\newcommand{\textgreek}[1]{\begingroup\fontencoding{LGR}\selectfont#1\endgroup}
\begin{document}
physics (from ancient greek \textgreek{f'usis})
\end{document}

For longer passages, perhaps loading the polutoniko option with babel may be recommended. Check in the documentation of babel for the translitteration scheme used.

You may also choose different fonts for Greek (the GFS fonts support many of them).

Update

With recent and uptodate TeX distributions, one can also input directly the Greek characters:

% -*- coding: utf-8 -*-
\documentclass{article}
\usepackage[LGR,T1]{fontenc}
\usepackage[utf8]{inputenc}   % utf8 is required

\newcommand{\textgreek}[1]{\begingroup\fontencoding{LGR}\selectfont#1\endgroup}

\begin{document}
physics (from ancient greek \textgreek{φύσις})
\end{document}

Another way to do this:

\documentclass[10pt,a4paper]{article}
\usepackage[utf8x]{inputenc}
\usepackage[greek,english]{babel}
\begin{document}
physics (from ancient greek \textgreek{φύσις})
\end{document}

Here you can take advantage of LaTeX' ability to recognize Greek characters when babel loads the greek support module. utf8x (Extended UTF-8) encoding of the input file makes sure the characters are mapped correctly. As you can see, with this solution you can keep the Greek letters, no need to transcribe them with Latin characters. (Unlike egreg's solution, here I set the input encoding, not the font encoding.)