Many European cars of that period had seat mechanisms that were comparable.
I believe your assumption is correct about the knob being a reclining limiter, but not for being "folded forward, and return to one of three positions" but to "allow the seat back to be tilted down to a completely sloped position" (quote from an Alfa manual).
The seat backs were often spring loaded so that "when released, the seat will return to its normal position automatically" (again quoting the Alfa manual). This release mechanism came in handy when couples that were almost "caught in the act" at lover's cove needed a quick getaway. Remember, up to a few years ago it was illegal in Italy to have sex without being married. Cops were out to protect the morals and the law of the land. And it was probably equally embarrasing if her brother showed up.
The issue about sex in cars went as far as moving the handbrake release button in some car models to the underside of the lever to prevent limbs from accidentaly touching it and releasing the car. For some people, the earth really moved -- with an unexpected ending.
So. try to see if the knob has anything to do with tilting the seat back. You may have to turn it to set the reclining angle, and pull it out ot push it in to get the seat back to recline beyond its normal position.
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