PCP Theorem - Alphabet Reduction Step
You are asking about Dinur's proof of the PCP Theorem. The alphabet reduction step does use a PCP, but the PCP has very different parameters from the one you construct, and you don't necessarily have to use recursion to construct it. In particular, in Dinur's proof, because this inner PCP for the alphabet reduction is applied on constant sized input, we don't care if it has huge (say exponential or even more than that) blowup, which makes it comparatively easy to give a direct construction of a good enough PCP. 

The entire proof including this stage is described in several places (see answer to this question), and so you may find a different description that you like better. In particular, in my complexity textbook with Sanjeev Arora this is covered in Chapters 11 and 22, we offer there two alternative ways to achieve the alphabet reduction step. One is using Hadamard-based PCP in the main text. But maybe the simplest self contained variant of it is the construction worked out in   Exercise 22.5. We also have a table, in Section 22.2.1, that shows exactly what very step of the proof does to the alphabet size (and other parameters such as soundness error, size and number of queries) and that may allay your concern.