At midday inside the sprawling central assembly building of Red Flag Enterprises here, thousands of white-suited auto workers are smoking and chatting during breaks along the main production lines as the plain, dull-yellow bodies of cars dangle overhead.

Along one wall of the factory, however, some 100 mechanics and assemblers bustle about a moving line of subcompact cars whose metallic-paint sheen, styled hubcaps and color-coded molding betray a radically upscaled product. Lest anyone doubt what is going on, a huge red banner spells it out: "Yugo: a project of the century -- the biggest chance of our economy."

The finished pint-sized hatchbacks at the end of the line may seem trifling to American consumers or second-rate to U.S. auto critics. But for workers here, as well as government officials and other Yugoslavs, the Yugo auto -- exported to the United States since late last year -- is a glittering symbol of this nation's highest hopes for development.

So far, there is little substance behind the excitement: only 10,000 of the cars were finished and shipped to U.S. dealers last year. Betting that the car's $3,990 sticker price will quickly attract buyers, however, the Red Flag factory is gearing up to export 60,000 more Yugos to America this year and 150,000 by 1988, a figure equal to three times the firm's current total exports.

The result could be the first major foothold in the U.S. market for a country desperate for export earnings to pay off a $20 billion foreign debt -- and the beginning of a revolution in the way Yugoslav industry works. The way the car has been conceived, financed and produced here suggests a commitment to innovation and efficiency by workers and managers unknown in most of Yugoslavia's stagnating socialized industry.

"The Yugo is important because it shows an organized, large-scale effort to do something serious. It is showing people what it takes for efficiency and international quality," said Ljubisa Adamovich, an economist at the University of Belgrade. "If Yugo is a success, it will become a role model for many other firms."

The risks of the project are also great. While American consumer satisfaction with the Yugo could lay the groundwork for the exports of many other products, a bad reputation for quality could spread from the auto to all things Yugoslavian and demoralize factories and their workers. "If it flops, people will point at it as an example of how making a big effort to sell abroad isn't worth trying," a diplomat said.

In that sense, the Yugo's fate indeed could be crucial for a country whose embrace of unorthodox communism and international nonalignment depends in part on its ability to balance trade with the Soviet bloc with economic ties to the West. Yugoslavia already has suffered five years of declining incomes and rapidly rising inflation and unemployment brought on in part by the burden of its Western debt and difficulties in selling abroad.

Over the last three years, the country has succeeded in increasing exports and drawing net earnings from its foreign exchange that, together with aid from Western governments, banks and the International Monetary Fund, have allowed it to manage its debts. But Yugoslavia's export sales still have not met the expectations of government planners and creditors, and some critics say the modest gains achieved have a weak foundation.

Among the most difficult markets to crack has been that of the United States. As the U.S. foreign trade deficit soared to an all-time high in the last two years, Yugoslavia has been one of the few countries that has bought more goods from the United States than it has sold.

Yugoslav officials were hunting for solutions to this problem when American industrialist Armand Hammer visited the country and suggested that car exports might pay off. Hammer put Red Flag officials in touch with a firm in the United States; soon afterward, the Yugo project was born.

What followed was a makeover of the factory, the product and worker organization that could be as significant within Yugoslavia as any eventual success with exports. Before beginning the Yugo project, the Red Flag Enterprise was plagued with the typical ailments of national industry: production far below capacity, antiquated equipment and declining product quality, paltry exports and declining real wages.

Targeting the U.S. market, however, created imperatives of quality and productivity that the Red Flag could not ignore. The Yugo, a locally designed car based on the engine and technology of the Fiat 128, quickly was subjected to more than 150 changes and improvements.

In organizing assembly of the car, Red Flag also managed to bypass some of the most ingrained patterns of the self-management system. Managers put together an elite group of workers who agreed to accept stricter work rules and quality standards, reportedly in exchange for higher pay. An average worker at Red Flag earns 80 cents an hour.

Several experts said that few, if any, other large factories in Yugoslavia had managed to organize work shifts, enforce performance standards or differentiate pay in the manner of Red Flag's Yugo line. Milutin Radivojevic, a Yugo assembly worker and 22-year veteran of the plant, said, "It's one thing when you have complaints about the cars here in Yugoslavia, and another thing when there are complaints from over there in the States."

Still, some of the old problems have lingered. Red Flag Director Srboljub Vasovic said production is not yet cost-efficient enough to turn a satisfactory profit, and despite the efforts to ensure quality, the Yugo has been severely criticized by some U.S. auto reviewers.

At Red Flag, workers seem acutely aware of the boldness of the gamble. "At the beginning, there were some doubts, because we knew that the biggest car manufacturers in the world were competing in that American market," said Tomislav Radovic, a worker leader. "Now the feeling is different. The workers feel that these exports to the U.S.A. are a proof that the Red Flag factory can succeed." CAPTION: Picture 1, The subcompact Yugo. Its suggested retail price is $3,900, and Yugoslavia hopes to sell 60,000 of them here in 1986.