THE LITTLE PEOPLE. By MacDonald Harris. Morrow. 362 pp. $16.95. y Gregory Feeley

THE LITTLE PEOPLE, MacDonold Harris' 12th novel and his eighth since The Balloonist won him acclaim 10 years ago, continues his exploration of Eros and reality's uncertain hold on the psyche. Like most of Harris' novels, The Little People is international in character; Bonner Foley, a Baltimore academic on sabbatical in London, is the author's figure of the American abroad, the Christopher Newman or Daisy Miller who appears -- often in disguised form -- in almost every Harris novel. Fanciful, witty and ultimately mysterious, The Little People brings the familiar elements of Harris' work -- the intellectual playfulness, the numinous sexuality, the disturbing sense of fatalism -- together into a work of great appeal and surprising power.

The novel opens as Foley, who has suffered a mild breakdown and spent a season convalescing outside London, retires to the country to stay with friends. These prove to be the family of James Boswin, a rich American industrialist who has married into -- in fact virtually bought up -- a venerable but reduced family of the landed gentry, and seems intent upon transforming himself by an act of will into an English country squire. His daughters, although American born, seem already to have reverted to their mother's blood and exert a peculiar influence upon Foley. We are on familiar ground here: intelligent, diffident MacDonald Harris man at the mercy as usual of MacDonald Harris woman, as well as something else -- the mysterious summons to art as in Tenth, or the local influences in Yukiko and The Treasure of Sainte Foy.

But this time there is something sinister in Foley's unworldliness; his delusions of sensitivity to iron, and his odd susceptibility to the engaging but eccentric Boswins, presage a darker journey through the undergrowth of the soul than is offered in most of Harris' books.

When Foley goes tramping in the countryside surrounding the grounds, he hears a distant murmur, which resolves into unearthly singing. Pushing himself deeper into a wood, Bonner discovers the Little People, barefoot, child-sized, and seeming to come from an older England, when iron was unknown and the power of Faerie still held sway. The creatures address him by name, then entertain him with a dance, by which he is guiltily aroused. They end by giving him a gold coin, which upon inspection the next morning appears to be a Krugerrand he had earlier found in the drawer of his nightstand.

Foley does not speak of his encounter, and soon has involved himself deeply with his otherworldly friends, to the extent of leading them on a nighttime excursion into the village, where he helps them break into a shop where they can loot honey jars. When a local train derails after the driver reportedly saw a little man on the rails, Foley -- by now wondering about his soundness of mind -- seeks the driver out and questions him, but concludes that the man's muddled account, which seems to corroborate some of his own details, was tainted by leading questions. Nevertheless Foley impulsively smuggles the slow-witted engine driver away from his domineering household and installs him in one of the estate's outbuildings. Soon he has orchestrated a full-blown folie

ALTHOUGH certain details seem to suggest there is something to Foley's talents and his mysterious Little People -- the Boswins at least are convinced he can sense iron -- Harris intends no Jamesian ambiguity as to whether it is supernatural or psychological forces at work here. Foley, who has made a name for himself studying archetypes and myths in old English literature, has happened onto the ideal circumstances in which his growing delusional system may resonate. The two beguiling sisters, with a rich and benevolent father (in folktales he would be a king), create a mysterious allure whose spell affects not only Foley but the reader as well. It is a measure of Harris' great skill as a novelist that this insidious mythopoeia, which can only end in calamity for Foley and those around him, manifests as a powerful narrative for the reader, compelling and intensely readable.

It has not perhaps been remarked how peculiarly American this theme has become. Keats' "La Belle Dame Sans Merci" and Goethe's "The Erl-King" hover over any literature of man's surrender to fantasy, but the prose successors to this tradition seem resolutely of the New World: from Washington Irving to Conrad Aiken's "Silent Snow, Secret Snow" and modern writers as dissimilar as Alice Hoffman and Joyce Carol Oates. Harris' 1982 Screenplay directly addressed the questions of how film reflects our inmost desires, and his immediately preceding novel, the wonderful Tenth, makes formal comedy out of the propositions that art is a dangerous thing and the artist a hapless reed. For Harris, human kind cannot always bear very much reality. "Thank God for the featherbed!" cries a character at the end of The Balloonist, recalling an earlier adventure when it is in fact freezing asphyxiation that confronts him. Such a summary may not do justice to the humor, sense of adventure, or passion in Harris' novels, all of which The Little People has in ample store. Often praised by critics but yet to enjoy a popular success, MacDonald Harris may win with The Little People the audience he deserves.