It is possible to convert to a rack and pinion, I did it on my 500R which is the same floorpan as the very early 126's.
Its a quite involved conversion, you need to either cut the inner front panel (with the mounting brackets for the rack) off a later 126 and weld it in place of the existing panel or buy pre fabricated brackets from
www.fiat500sport.comThe fabricated brackets need to be carefully positioned (ideally with a later car for reference) in order to get the geometry correct and welded, I would recommend putting in some extra metal to strengthen it up as well. A new hole will need to be made for the shaft of the rack to go through the footwell. Once this is done you will need a later 126 steering column which has a different mounting at the top (compared to the 500R – not sure about the early 126) some extension of the bracket may be required to mount the column.
On my 500R the I welded the bottom 2/3 of a 126 column to my existing 500 column and made a hefty support/bearing to support the top of the column (the mounting at the top of the 500 column is a simple hanging bracket, this is nowhere near strong or stable enough to support the articulated 126 column)
Converting from dynamo to alternator is by comparison a very simple job.
I hope this helps
Nigel