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Never seen this before.
Had every city in Italy with German unit.
Except Sicily was gone
Lost Naples
Italy surrenders.
Allies did not take Rome.

Start my turn, my 2-Star Army in Rome, entrenched goes away?

Happened to me some time ago. Exactly the same thing. I thought it had been fixed but maybe its gone backwards again?

Did italy's NM take a massive hit in the turn before?

If so I might have something I can do.