The whole city of Turin celebrated last week as hometown automaker Fiat launched its two newest cars. Colorful banners festooned the streets, and fashionable shops added brightly painted bumpers and hubcaps to their window displays. At a gala dinner in the garden of the 17th century Royal Palace, hostesses in custom-designed Missoni dresses greeted 1,500 guests, who were treated to fine Barolo wine and an elaborate sound and light show. Journalists from 50 countries as far away as China and Australia covered the event, the kickoff for 10 days of festivities culminating in a televised open-air rock concert.

Lavish even for a company known for flamboyance, the extravaganza was mounted mainly to baptize the brand-new Bravo and Brava, models developed at a cost of some $900 million . Their mission is to challenge Europe's most powerful brands, including Volkswagen and Opel, in the huge market for midsize cars. But there was something else to celebrate too: once spinning on the brink of disaster, Fiat is back on track. After a long decline that led to a record $1 billion loss in the recession year of 1993, the firm has spent billions to boost efficiency by slashing jobs and modernizing production. Helped by a weak lira, Fiat rebounded to earn a $614 million profit last year, and should do even better in 1995.

Most important, it has unrolled a string of successful new cars, reviving Fiat's reputation for verve and styling. Its spunky compact Punto, launched in late 1993, was named "1995 Car of the Year" by automobile journalists and has become a European best seller. "It took a lot of courage to make those investments going into a recession," says Nick Snee, an auto analyst with J.P. Morgan in London.

The developments mark a sharp U-turn in Fiat's fortunes. Second only to Volkswagen in European sales volume as recently as 1989, the company watched its brands tumble into fifth place, behind General Motors' Opel, Peugeot-Citroen, Ford and Renault, losing market share even in Italy. Fiat's models and manufacturing plants were old and tired, and when Europe's auto market collapsed during the 1993 recession, its fortunes plunged, with losses totaling almost $1 billion.

Company patriarch Giovanni Agnelli, now 74, delayed retirement to handle the crisis, fearing for the independence of the firm his grandfather founded in 1899. Fortunately, in the all important auto division, renewal was already under way. Paolo Cantarella, an engineer and production expert, had taken the helm in 1990, aiming to roll out new models more quickly. "We were in a hurry, so we had to change the organization of the company, the way we develop cars, the setup on the factory floors and our cooperation with suppliers," he said in an interview last week. The auto division cut some 15,000 jobs out of 135,000 , halved the number of suppliers to 500 and involved them deeply in product development. It shuttered some plants, renovated others and spent $3.2 billion to build an engine facility and a state-of-the-art factory in Melfi, 160 km northeast of Naples. "They're probably beginning to lead other Europeans in production technique and catching up with the Japanese," says Daniel Jones, head of the Lean Enterprise Research Center at the University of Cardiff.

The first of the new products, introduced in 1993, was the small but splashy Punto, which took only 35 months to go from drawing board to showroom--compared with the usual 48 months to produce a Fiat car--and earned high marks for reliability. The company unveiled four new models last year, with eight more set for this year,including the Fiat coupe, which has won raves for its sexy, muscular look. In the first half of 1995, Fiat outpaced all other European carmakers, with 5.4% unit sales growth in spite of a soft European market that grew only 1.4%.

Outsiders give much of the credit to the heavy-browed Cantarella, 50. "He brings flair, risk, a love of cars," says John Longhurst, an auto analyst at Union Bank of Switzerland. Cantarella admits to being a "car nut" with a passion for the machine. "Cars are a thing of beauty," he says. "There is no other industrial product that is so important for self-image, so sensitive to styling." Although he does not design the cars himself, Cantarella checks every detail of the process. "He has a very good eye and can pick out the flaws right away," says Peter Davis, chief designer for the Fiat brand. Sometimes, Davis adds, if the engineers nix a design proposal as too expensive, "he'll say, 'It's worth it, let's go ahead.'"

Despite the recovery, "we are still convalescing," Agnelli cautioned at last week's gala, adding, "The success of these cars will make us strong, mighty and fighting again." Indeed, the company cannot ride to success solely on the tiny wheels of the Punto, which now accounts for 60% of Fiat's European production. The sporty, three-door Bravo and the more family-oriented five-door Brava, based on the same basic design but with different dimensions, styling and color schemes, will test whether Fiat can go beyond its traditional small-car strength to challenge such formidable midrange competitors as Volkswagen's Golf, as well as Renault's new Megane, being launched this week in Barcelona. "This is the heartland of the European car market, about a third of the total sales, and Fiat has to score a hit here to sustain its record," says John Lawson of DRI/McGraw Hill.

So far, early reviews of the Bravo-Brava combo have been favorable, and the company plans annual sales of 350,000 units. Wisely, however, it is looking beyond the fiercely competitive yet slow-growing Western European market. "To play safer, we are playing on more tables," explains Cantarella. Fiat has major factories in Poland, Morocco and Turkey. Its 30% market share in booming Brazil is a big money-maker, and a new plant in Argentina is currently under construction.

Instead of trying to re-enter the tough U.S. market, Fiat has gambled $2 billion to target smaller but faster-growing markets in Asia, Africa and Latin America with a "world car," the Fiat 178. Actually a family of five models, from a small hatchback to a pickup, the 178 is designed to be sturdy and easy to assemble and repair. The first editions will roll off South American assembly lines next year. While Fiat hopes for eventual worldwide production of 800,000 cars a year, no one has ever tried producing the same model for different developing countries.

Other uncertainties loom as well. Agnelli, the country's most influential industrialist, recently had heart surgery and has designated his nephew, Giovanni Alberto Agnelli, 31, as his eventual successor, though no hand-over date has been set. European carmakers face new threats from hard-charging South Korea in the small-car market, while an agreement that partly protected Europe from Japanese competition expires in 1999. If Fiat can meet such challenges, that will really be reason to say Bravo. Or even Brava.