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.

paesello means "small village" or "small town", it is not used in the spoken language any more, it is a sort of ancient word, do not use it....