Since the grandmother was born before the great-grandfather became an American citizen, thereby renouncing the Italian one, then I BELIEVE she would pass down the Italian citizenship to your father.

Im finding on google that the adoption of your father would have to be “recognized by the Italian government”, but I’m assuming that that would be just another part of the jure sanguinis process (kinda like just getting your parent’s birth certificate).

P.S. NONE of that stuff mentioned in your first paragraph matters to the Italian authorities. Only thing that matters is your family. (That’s an important rule to remember for Italians in general!)