WHEN Algeria's new ambassador to Washington paid a visit to a high-ranking State Department official recently, he was greeted with lines from the Irish poet Yeats: ''Things fall apart; the center cannot hold;/ Mere anarchy is loosed upon the world.''
The ambassador, a professor of English literature, shot back with the concluding lines of the same poem: ''And what rough beast, its hour come round at last,/ Slouches toward Bethlehem to be born?''
The symbolism needed no explaining. The ''beast'' is Algeria's fast-growing and increasingly militant Islamic opposition movement; ''anarchy,'' the chaos both governments are convinced will result if Muslim militants topple the country's secular regime.
Behind the apocalyptic language is a nightmare scenario that haunts both nations and much of Europe and the Middle East besides: that the North African nation could become the next Iran.
Algeria has been caught in a cycle of Islamic terror and official intimidation since the government canceled a second round of parliamentary elections in 1992 because the Islamic Salvation Front (FIS) appeared set to win.
Some 30,000 killings later, fighting between the French-backed, military-dominated government and Islamic militants has brought the country to the brink of full-scale civil war -- a conflict that has presented the Clinton administration with unenviable choices.
''The US doesn't want to have an Islamic government in Algeria,'' says Mary-Jane Deeb, editor of the Middle East Journal in Washington. ''Then again, it doesn't want to get caught in a situation where Islamists come to power, and we've been backing the wrong guy.''
Unlike Iran, Algeria is primarily a problem for France and Europe, and not the United States.
Nevertheless, US policy toward Algeria has been driven by memories of Iran, where the US ignored growing opposition to the pro-Western regime of Shah Muhammad Reza Pahlavi, which was toppled in 1979 by Islamic militants, and where it has been branded as the ''Great Satan'' ever since.
Determined not to be burned again, Washington has leaned on the Algerian government to seek out and open a dialogue with moderate Muslim leaders, as US officials themselves have quietly done with representatives of the FIS, Algeria's largest Muslim organization.
Behind the policy is a conviction that a political settlement is the only basis for domestic peace in Algeria. It is a conviction that is warmly disputed by the Algerian government.
A Rome-based community group that played a key role in the 1992 Mozambique peace talks invited the Algerian government and opposition groups to a meeting in November to find a diplomatic solution to Algeria's crisis. Representatives of 12 Algerian organizations, including the outlawed FIS, attended the meeting. But it was boycotted by the government.
''It is a misguided policy to try to distinguish between 'moderate' and 'extremist' fundamentalists,'' Osman Bencherif, the Algerian ambassador, told a recent gathering at the Washington Institute for Near East Policy.
''They may differ as to the tactical means, but the final goal of all fundamentalists is the same'' -- an Islamic state that will be ''totalitarian'' and ''theocratic,'' Ambassador Bencherif says.
In such a state, he adds, the only alternatives for moderates will be ''the suitcase or the coffin'' -- to emigrate or be killed.
Violence in Algeria has escalated since last February, when Islamic militants stepped up their campaign of terrorism by targeting police stations and apartment buildings where families of Algerian security forces reside.
The government has responded with massive sweeps in Algeria that have killed thousands of militants.
Bencherif says the only way the US can help avoid the ''new plague'' of a Muslim regime in North Africa is to stop urging Algeria to talk with the FIS and to ''stand unambiguously with the government.''
ASKED last week about US policy toward Algeria, the leader of another Middle Eastern nation beset by Islamic extremism said his government's efforts to conduct a dialogue with Muslim factions has proved counterproductive.
''In our country, we've had talks for 10 years,'' Egypt's President Hosni Mubarak said in an interview with the Monitor in Washington.
''But it was a hopeless case. They used the 10 years to develop and grow,'' Mr. Mubarak adds.
Many experts say militant Islam in Algeria is not religious at heart but a movement of social protest among younger Algerians produced by high rates of unemployment, almost nonexistent economic opportunities, and scarce housing. It has been fueled by support from Iran, according to Algerian officials, and by hardened veterans of the war in Afghanistan, who have eschewed the ballot box in favor of ''blood and martyrdom'' to create an anti-Western Islamic state.
Algerian officials say that the only way to defeat such a movement is with economic growth and sweeping reforms in everything from public education to agriculture. But that will take time -- more time, many outside observers worry, than the Algerian government can buy with military force alone.
One way to help, Dr. Deeb says, would be for Western creditors to reduce or write off Algeria's $26 billion debt, the interest on which absorbs more than half the country's total revenues, earned mostly from oil and natural-gas exports.
''Instead of wringing our hands and waiting for the inevitable fall of a government the West considers important, Western nations should forgive or substantially reduce the debt so Algeria's foreign earnings can be used to generate economic growth,'' Deeb says.
There is precedent for such a move. The US wrote off $7 billion of Egypt's debt and a portion of Morocco's during the Gulf war. It has promised to do the same for Jordan as a reward for its 1994 peace treaty with Israel. So far US officials have indicated no interest in taking Algeria off the hook.
Unlike the shah, who lost the will to govern after losing US and British backing in the late 1970s, the leaders of Algeria's government remain intent on holding power and defeating the fundamentalists.
But, also unlike the shah, they preside over a shrinking economy -- a circumstance that has led some US officials to worry privately that the government may be living on borrowed time.
Diplomatic analysts in and outside the government agree that an Islamic revolution in Algeria would put enormous pressure on regimes in Morocco, Tunisia, and Egypt and could inundate France with refugees.
France annexed Algeria in 1842 and governed it until 1962 when Algeria regained its independence after a bitter eight-year war. When Islamists came close to gaining power in 1990, France threw its support behind the government.
In addition to producing a mass exodus across the Mediterranean, French officials fear that an Islamic revolution could jeopardize lucrative oil and gas contracts with Algeria.
For the US, the direct stakes in Algeria are comparatively small. Only a few US companies, principally in the oil and gas sector, have interests in Algeria.