Paesello is indeed used in current Italian.
The normal translation of small town is paesino.
Paesello also means small town but adds a connotation of slight humour/sarcasm or is meant to express affection, still with some humour, an approximate translation should be "dear little village/town".
Not by chance the phrase you include makes fun about the fact that someone cannot stay away from his dear little town/village for too long.