Commonwealth troops wouldnt have any problems lining up against all the axis factions and just augment the Italian faction with German troops/armor as needed, which is entirely realistic as that's what they did.
So... Half the faction... No... The better half of the faction would be a mix of OKW and Ostheer units, which realistically would be the only units people would use unless random Italian units were artifically given firepower in design. -Just with the mark of Italy stamped on them.
Its not impossible to design, but unless you change it so it no longer represents what it is based off of, then Italy will stand no match to the Allies. Thats... Kind of what happened in war... European Italy is an underdog, but Africa Italy did something...
On the other hand, the Commonwealth actually did develop their weapons over time... The British had their own guns, had their own team weapons (with an AT gun the Americans stole), continuously developed their own heavy tank and they developed a medium tank, and they have many recognized spec ops groups as well as a great air force. Granted, they used a few vehicles bought from the US, with the Firefly a fundamental example since they decided they needed a tank to take out heavy armor. But their army composition had their own unique mark on them.
Not to flame, or for you to take offense, but that is why... A decent amount of people look over that form of Italy becoming a faction. Too much is needed to be stolen from the current German factions in order to compete with Allied units, and then it isnt an Italian faction anymore. Itll look unprofessional, and players would rather play the real thing which would most likely play better.
On the list of potential factions, Italy is slightly down the list... In that regard, since I am definitely for some sort of Afrika action if Relic bothered touching that concept.
As a campaign, maybe, but not as a full-fledged faction that is expected to take on USF and SU. Again, this is simply a response to a "what-if", so... Anything's possible.