By GINIA BELLAFANTE

For Columbia Pictures, it was an act of promotional incorrectness. To flack their upcoming flick Last Action Hero, the company deployed a 75-ft. balloon version of the film's already oversized attraction, ARNOLD SCHWARZENEGGER, in the heart of Gotham's Times Square. Arnie (suspiciously more intriguing in inflatable facsimile) wasn't the problem, but his portable arsenal was. Included: a fistful of dynamite, an unfortunately insensitive reference given the World Trade Center tragedy, which had transpired only three days earlier and three miles south. "The balloon was designed six months ago," said the film's spokesman Steve Newman. "We thought Arnold with a gun was too violent an image." So why not add some explosives? As it turned out, the hot-air hero was defused only hours after he was erected. Concerned that New Yorkers would take offense, Columbia surgically removed the dynamite and planted a police badge in its place.