SPREADING lawlessness is rattling the government of Pakistan Prime Minister Nawaz Sharif.Only a few weeks ago, Mr. Sharif, an industrialist better known for his political contacts than finesse, seemed to step into his own after a bumpy six-month initiation to power. He survived turmoil over his support for the US-dominated coalition during the Gulf war. The threat from the military eased with the announced retirement of Army Chief Mirza Aslam Beg. Despite a US aid cutoff, Sharif impressed foreign investors and donors with ambitious plans to restructure Pakistan's floundering economy. But now Sharif grapples with a wave of crime and terrorism which has killed hundreds of people through bomb blasts, train crashes, kidnappings, and murders. In a controversial move, Sharif pushed through a constitutional amendment in July to handle cases in high-crime areas. The new law suspends supreme court jurisdiction and establishes special "terrorist courts" in terrorism-affected areas. But to placate critics, the amendment stopped short of giving police emergency arrest and detention powers. Several gruesome massacres have shaken Punjab, for years a refuge in Pakistan's long history of violence. Troubled Sindh province has plunged deeper into ethnic and political turmoil and threatens to undermine Sharif as it did his predecessor, former Prime Minister Benazir Bhutto. A dispute over whether the military should be able to arrest, try, and convict offenders eventually led to Mrs. Bhutto's dismissal in early August. "Nawaz is most vulnerable on Sindh," says a Western diplomat. "This is the area of most concern for the military." "This law--and- order situation has to be brought under control," says a minister in Sharif's government, "especially in Punjab, which is the heart of Pakistan." Unnerved by the disarray, Sharif has cried conspiracy by Indian and Afghan intelligence services, and in late June he called for tighter border security. Earlier in the summer, he canceled a trip to Japan during which he had hoped to win crucial investment and economic aid. The government has tightened law enforcement, including ordering the arrest of all members of Al-Zulfikar, a militant organization linked to the family of Benazir Bhutto and her party, the Pakistan People's Party (PPP). Bhutto denies her party is involved with the group. The crackdown comes as the situation in Sindh has become acute, Pakistani analysts say. Since the murder in mid-June of a judge trying Bhutto's husband and several top leaders of her party, the Sindh provincial government has blamed the PPP for the violence and arrested hundreds of its supporters. The arrests have not only deepened the political divide in Sindh but failed to curb the violence that has become random and widespread. Despite government orders to surrender unlicensed weapons, many Sindh residents refuse to do so out of fear of corrupt police officials as much as criminals, political observers in Karachi say. In June, renowned Karachi social worker Abdus Sattar Edhi stunned Pakistanis with his threat to close his legendary ambulance service and return to India from where he emigrated in 1947. "This is happening to me and my volunteers after three decades of service," Mr. Edhi said in a radio interview after several of his workers were attacked. "It is better for me to appeal to the Indian government to return back to India and work over there." Sharif remains nervous over whether Beg, the politicized Army chief with whom he split during the Gulf War, will retire on schedule in August. To quiet right-wing rivals calling for martial law, the prime minister, a prot of the late President Muhammad Zia ul-Haq, reopened the investigation into the 1989 air crash that killed Zia and the top Army command. "Beg was the main beneficiary of the accident," says a government official. "There's an 80 percent chance he'll retire. But in Pakistan, there's always that 20 percent to worry about." The wave of violence is also ruining Sharif's economic blueprint, which has become the signature of his government. Indeed, the leader admits violence is undermining new investment, privatization, and deregulation and is "the main challenge to my economic policies." Sharif also faces stiff resistance from the corrupt bureaucracy which for years has controlled Pakistan's deeply troubled economy. "Privatization is an idea whose time has come in Pakistan," says a Pakistani analyst. "The catch is, the system which implements it is bureaucratic." Despite opposition from the bureaucracy, Sharif has scored some initial success in privatizing a large bank and a chemical company. He's worked out elusive agreements among the provinces to share the waters of the Indus River and federal tax revenues. He finessed approval of a bill that places Pakistan under the sharia, or Islamic law, but blunts the Muslim clergy's powers and fundamentalist dictates. "He seems to be building for the long term," says a sympathetic Western diplomat. "Whether he'll have the time is another matter."