Frank BRUNI, Pinocchio Returns, and Italy Is Swept Away. Pinocchio puppets hang beside crucifixes in a stall in downtown Rome. A new film by Roberto Benigni has revived interest in the Italian fairy tale. All across Italy, Pinocchio rules. Images of the mischievous, longnosed puppet appear on the covers of books, the pages of magazines and posters at bus stops and street corners. With the release here of a new, live-action movie of "Pinocchio" by the Italian star Roberto Benigni, Italians are in a kind of Pinocchio swoon, attended by the kind of Hollywood-style hoopla and merchandising that no homegrown movie has ever spawned. That means latex Pinocchio noses, Pinocchio backpacks, and, of course, Pinocchio dolls. "There bas never before been this level of saturation for an Italian film," said Claudio Trionfera, a spokesman for Medusa Film, the company distributing "Pinocchio" in Italy, where it opened on Friday on about 900 screens, a national record. The success of Mr. Benigni's Oscar-winning movie, "Life is Beautiful," and his status as Italy's most popular filmmaker gave him the clout he needed. He poured about $45 million into "Pinocchio," another Italian record, and plays the title rôle, even though he is about to turn 50. At one of the Feltrinelli bookstores in Rome, Pinocchio books take up several shelves. They are scattered and stacked everywhere - Pinocchio comic books, Pinocchio reading primers, a volume of "Pinocchio" with commentary by Mr. Benigni and a volume in written in Neapolitan dialect. At Rocco Toys in Rome, there is a talking Pinocchio ("I will become a boy!") and an all-purpose art toy called "Pinocchio Design Factory." "The culture of mass marketing has arrived here, too," said Giorgio De Rienzo, a newspaper literary critic and Pinocchio savant. An article in one magazine described Pinocchio as a quintessentially Italian character, "intolerant of rules and conformists, lively but listless, greedy for pleasure but ready to shed tears of repentance." And in this country where just about everything is political, Pinocchio even appeared on a poster by the rightist National Alliance party, which accused the left of lying, a la Pinocchio. Perhaps because the author, Carlo Collodi - whose real name was Carlo Lorenzini - was Italian, people here feel a special affection for the Pinocchio tale. Mr. Benigni said that he dreamed of a new "Pinocchio" for years before co-writing a script and getting behind the camera to direct it. Mr. De Rienzo describes the Pinocchio fable as "characteristically Italian." "Pinocchio," he said, "is living on the line between order and disorder." A better description of this city and country would be hard to find.