Outrageously tall Southern tales; Oral History, by Lee Smith. New York: Putnam. 286 pp. $14.95.

Lee Smith is the one good Southern writer most readers don't seem to know about. Her new novel takes place in the fictional (indeed, nearly mythical) setting of Hoot Owl Holler, Va., and consists mainly of interlocking tales told to a college girl who returns home to do an ''oral history project'' about her family. It offers a vivid gallery of passionate, contentious people and tells a number of outrageously compelling tall tales.

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