This is a town where nothing seems real, a tiny place with a wacky past and a wackier present, a thriving anachronism that in addition to everything else plays host to perhaps the most respected small film festival in the world.

Which is just as it should be, because Telluride, declared in toto a National Historic Landmark in 1964, looks like nothing so much as the backdrop for an old B western. At an altitude of 8,745 feet in southwestern Colorado, it is surrounded on three sides by stunning mountains alooming up, like the walls of a house, to the 14,000 foot range. "If Telluride ain't paradise," said trumpeter Dizzy Gillespie on a recent visit, "then heaven can wait."

Founded in the 1870s and named afer tellurium, an element often found combined with more prestigious ores, Tellurides mountains yielded billions of dollars in gold, silver, copper, lead and zinc and are still laced with enough miles of tunnels to reach from Los Angeles to San Francisco.

A classic mining boom town, it supported scores of bordellos and liked to call itself, no one is really sure why, "The Town Without a Belly Ache," William Jennings Bryan and Sarah Bernhardt stayed at its hotel, Butch Cassidy robbed his first bank here and a cantankerous engineer made it the first city in the world to be lit by alternating current.

At its peak, Telluride had 5,000 inhabitants, but the town began going to sleep as the mines began petering out and population had dropped to 350 before the area was discovered about a decade ago by young, wealthy folk known locally as "trust funders."

Slowly, the character - if not the old Western facade - of the town changed. Population rose to over 1,000, hang gliders, not miners, climbed the mountains, quality restaurants opened in old bordellos, a mighty 10 watt FM progressive rock station began broadcasting, the bookstore started burning incense and American Express was welcome all over. The overall feeling is of a college town that never graduated, where 70 per cent of the population is under 35, a live-in disneyland for people who never want to go home.

Much of this boom was built on the town's skiing facilities, which took quite a jolt last winter when next to no snow fell. Still, Telluride's good-time inclinations, as well as its reputation as a lively drug center, apparently were not done any irreparable harm. "If there was as much snow on the ground as there was in the town," said one resident, "There'd have been skiing every day."

Among the people captivated enough to move to Telluride was Bill Pence, a film distributor, and his wife, Stella. James Card, the now-retired head of Eastman House in Rochester, N.Y., one of the world's major film archives, visited an loved the place, as did Tom Luddy, who runs the prestigious Pacific Film Archive in Berkeley. Why not have a film festival here, someone suggested, and it was done.

Or course, given the town's ambiance and perculiarities, it wouldn't be just an ordinary festival, not an orderly series of illustrated lectures like New York nor a madhouse like Cannes, the Ur-Festival, guaranteed to take years off your viewing life. Telluride would be, in the words of Stella Pence, festival manager, "a labor of fun."

"This is just to have a good time, a big party once a year for lots of people who love movies," she explains. Only 450 tickets are sold for the Labor Day weekend event despite a demand many times that. "Sometimes we're asked, 'What're you doing in a crummy little down like Telluride instead of being in Aspen?' but the people who come every year like it small and exclusive. When they return, we want them to feel they've never left."

Organized around a sprinkling of new films, archival material and retrospective tributes to film greats, Telluride created the most controversy its very first year, with a tribute to Leni Riefenstahl, maker of Nzai-era propogand documentaries like "Triumph of the Will" and "Olympia." Since then the festival has become known for a low-key, easy-going ambiance that makes people like Julie Christie and directors Werner Herzog and Barbet Schroeder return every year just to be around.

There was some grumbling this year that the new films chosen, like Volker Schlondorff's "Coup de Grace" and Larissa Sheptiko's "Ascent," were not likely to go through the box-office roof, but this is to miss the point about Telluride. "Unearthing stuff you can't see other places, introducing forgotten filmmakers, is to us far more rewarding that premiering the brand new Fellini or whatever," Stella Pence explains.

And really, once one is seated before the hand-painted curtain in the turn-of-the-century Sheridan Opera House, site of the retrospective tributes, Telluride becomes magic. This is place for those who are willing not only to appreciate and remember but to revel in firms past, a place you come to for a feeling, a state of mind, not the sensations of the moment.

It is also a place you come to because of what the film-makers say, how they react to its special atmosphere. This year, for instance, Werner Herzog spoke about filming a volcano he thought was about to explode in an attempt to decide "was film more valuable than life more valuable than film," and Kevin Brownlow jokingly called his histocially rigorous "Winstanley," "the Movietone News of 1649."

The highlights of the 1977 festival, however, its most emotional moments, revolved around Michael Powell, a visually audacious British director - "The Red Shoes," "Thief of Bagdad," "Tales of Hoffman" among others - whose uncompromising works have generally been misused and mutilated by American distributors.

First, on opening nigh, Powell was nearly broken up when Martin Scorcese, a long-time fan, made a surprise appearance just to present him with his award.And on the final afternoon, Powell introduced a screening of a meticulous French Revolution drama, "Scaramouche," made by his master, the silen director Rex Ingram.

Orginally scheduled only to talk before the film, Powell was so overcome by seeing "Scaramouche" again that he rose when it was over and told the audience, very slowly and quite emotionally that, "It was from Rex Ingram that I learned standards. It cost me a great deal, but it's been worth it."

Only in Telluride.