SHROUDED in a chronic brownish smog. Crisscrossed by traffic-clogged streets. Ringed by slums and rarely seen snow-capped mountains. This proud, ancient metropolis - once a city of lakes and flower gardens built by the Aztecs 650 years ago - now suffers the indignity of extreme overpopulation and environmental decay.The former lakes are covered by a sprawl of concrete, smoke-belching factories, and teeming humanity spread over roughly 800 square miles of mountain valley. With an official population of 15 million people (unofficially 18 million), Mexico City will see another 300,000 take up residence this year by birth or immigration. By the end of this decade, unofficial estimates have the population of this second largest city in the world (after Tokyo) swelling to as much as 25 million. For years now, the assessment of Mexico City's future has been one of inevitable urban dysfunction. About 30 percent of the residents have no sewage system. Some historic buildings are literally sinking as water is pumped out of underground aquifers faster than it can be replaced. Many urbanists see Mexico City as a classic example of third-world growth gone haywire. Others are slightly more sanguine. They note, for example, that unlike Los Angeles, Mexico has a well-developed, graffiti-free public transportation system used by 85 percent of the population. Nonetheless, the overall impression is one of a city facing Herculean problems. This city administration, like every administration since the 1970s, claims it can tame the urban monster. "At the end of the decade, Mexico City, instead of being a paradigm of urban disaster, will be seen as a city brought back from the brink of disaster, which reorganized to solve its worst problems," says Manuel Camacho Solis, the presidentially appointed mayor of the federal district that includes more than half the metropolitan population. What lends credence to this boast is that - for the first time in a decade - there seems to be the political will and money to back it up. The Mexico City budget has doubled in the last five years and at 12.4 billion pesos ($4.1 billion) will be 10 percent higher in 1992 than the previous year. The city surplus, and federal sales of government-owned industries, are funding programs aimed at cleaning up pollution and poor areas. Private commercial investment is at its highest in 20 years. "Mexico is in a period of transition similar to what's been seen in New York, Chicago, and Philadelphia," says Jorge Gamboa de Buen, director of urban planning and environmental protection. "The traditional productive base has been the government, manufacturing industry, and services. We're in the process of becoming a city of services." This process is aimed at breaking the development pattern set in motion by President Miguel Aleman in 1945. Aleman and succeeding Mexican presidents made the nation's capital the engine of economic growth - concentrating labor, industry, markets, and basic infrastructure in one place. Mexico chalked up impressive growth until the mid-'70s, and the city's industrialization concept was picked up throughout the developing world. But the "big smoke" of heavy industry also attracted millions of peasants looking for work from all over this poor nation. Insufficient planning and funding left the city in its present state. "Many of the neighborhoods and sub-cities swallowed up by the urban march have lost their sense of social unity and urban structure," says Estefania Chavez de Ortega, director of the urban planning undergraduate program at the Universidad Nacional Autonoma de Mexico. It is also no longer a source of pride that there are 35,000 factories here or that this city alone produces 36 percent of the nation's gross national product. Giving impulse to the trans-formation is the commitment of Mayor Camacho Solis and Mexican President Carlos Salinas de Gortari to pull the city back from the brink of ecological disaster. That mandate permeates decision making on almost every city project. (Taxi pollution, right.) For example, the welcome mat for heavy industry has been withdrawn. The most symbolic move was the abrupt shutdown last March of a huge petroleum refinery by President Salinas. More than 500 firms have been hit with fines or temporary closures this year for violating environmental standards. Roughly 70 percent of all city industries have signed agreements to comply by 1994. "We're putting a lot of pressure on industrial manufacturers to leave," says Mr. Gamboa de Buen, the city planner. Stabbing at a satellite photo of the city, he cites a cement factory, a foundry, and a large chocolate-maker as having recently pulled up stakes. As for finding a place for the continuing stream of new inhabitants, Gamboa says one must recognize that new housing falls into two categories: legal and illegal. On the legal front, the city has adopted a program to pack people in, making the city more densely populated to slow the peripheral sprawl that creates higher transportation and public service costs. Taxes on undeveloped city land have tripled to force owners to build. The tactic for combating the housing shortage (there is a deficit of 1.5 million homes and an average of 4.6 people per home currently) is changing. Gamboa says government programs are shifting from 2,000- to 3,000-dwelling complexes and toward "200 units here, 200 units there." This fits with Ms. Chavez de Ortega's view that for a neighborhood to be restored, and for people to take social responsibility, requires sub-cities and distinct neighborhoods. Creation of an elected City Assembly three years ago is a step forward, she says. As for "irregular development" where tenants build without permission on empty lots or farmland, this administration has taken the politically difficult step of evicting settlers and expropriating more than 4,100 hectares (10,131 acres) of land to set aside as ecological reserves. But declaring an area off limits and keeping it that way are two different challenges. According to optimistic estimates, the city's population may not stabilize for 10 to 15 years. Marconi Osorio, a researcher at the University of the Americas here, says "that if the rest of the city is to survive, sanctions against violators of the 'green zones' must be tougher."