I know that once a satelite army has been eliminated you cant rebuild it.
2.66 says that you can rebuild it, it's just that it's permanently restricted to its home country & adjacent hexes. (11.42 mentions that you can't rebuild the Italians, because they would be restricted to Italy, which is off-map.)
But can you add step to them during the production phase?
Yes, there's no rule prohibiting that. (And the starting strengths of the satellite units increase between the S'42, W'43, and S'44 scenarios.)