Italy organises other Balkans countries to rip Yugoslavia to shreds (Bulgaria, Hungary etc), thus succeeding in all their traditional irredionist demands, while adding Montenegro to its protectorates. It therefore creates an allied Fascist Slovenia and Croatia under the Ustase, leaving a broken Serbia as the rump state. The Italians proceed to create a 'Little Axis' of Mediterranean countries (Spain, Portgual, Italy, Slovenia, Croatia, Bulgaria, Greece and Turkey) united by their common nationalist and authoritarian societies mixed with Anti-Communism. This completely shuts the Mediterranean down to the Soviets in the future.
Italy makes a deal in 1940 to purchase Tunisia but doesn't go to war, until it jumps on top of Germany in a gangpile. From there, they take Austria and proceed to add that to their Little Axis Union as a Fascist state. While never powerful enough to become the third bloc of the Cold War, it keeps a relatively friendly relationship with the West against the Soviets. Israel is closely associated with the bloc but doesn't join owing to its commitment to Democracy. Instead, Mussolini think Israel will be a great Colonial ally and proceeds to totally fund their war against the Arabs, leading to the wildest dreams of the Israelis coming true: the whole Trans-Jordan mandate falls into their hands. Of course, that turns out to be a curse since the land is so vulnerable to attack that it neccessitates close co-operation with Italy to survive. This sets off an apocalyptic reaction in the Arab World which is rendered inert by the overwhelming military might of the Fascist bloc with the tacit support of the West). Eventually, the Arab outrage takes on a particularly sectarian nature, leading to Lebanon to descend into bedlam, forcing intervention by the Fascist bloc again. Rather than simply restore order, they turn Lebanon into a Christian Israel to escape the waves of persecution the religion is receiving in the Middle East. This adds fuel to the fire, and Lebanon's imposed Fascist government proceeds to swamp the country with Christian refugees and encourages emigration of the native Muslims. Nasser tries to take on everyone but it fails, leading to Egypt's military obliteration and humbling, losing the Suez to Israel (there are more living Jews to immigrate in with less German occupations). Italy's creation of a Nuclear Weapon in the 1950s ensures their status as an international titan.
Lastly, Mussolini begins to massively encourage not only Italian but other European immigration to his colonies, particularly Tunisia and Libya, which receive hundreds of thousands of migrants, enough to make them majority Italian in the 1960s. Ethiopia was always going to be a disaster, but by playing divide and rule, Italy convinces Eritreans and Somalians to accept their rule to protect them from encroaching Ethiopian vengeance. Thus, with the exception of Ethiopia, Italy keeps her colonial Empire intact. With the Italian example, France probably keeps a few holdouts in Algeria, and Spain may keep the Western Sahara.
Eventually the 80s/90s hits and the Fascist bloc slowly disintegrates as democracy comes into vogue, but they keep a close connection for real-politik's sake.
Thus, Italy is an internationally respected, nuclear power with its own bloc in the Cold War, with almost total control over the Mediterranean between the Fascist powers and their friendly-democratic allies. It has huge amounts of Libyan and Somalian oil, a veto in the UN, a proactive foreign policy (in the Middle East especially) and has never been as powerful since the Roman Empire.
Whew, that's about as crazy as I can get. Pity for all the poor people who perished in the Colonial madness I described (although good for the Jews who weren't sent to the camps).