WO YOUNG women sat drinking sodas by the front window of a drugstore 20 years ago in Charlottesville, Va. "There goes Mr. Faulkner," said one. "Who's that?" asked her companion. "You mean you don't know who William Faulkner is?" the first woman replied incredulously. "Why he's Jill Summers' father, of course."

Now literary fame is centering once again on Charlottesville in the Blue Ridge Mountains. In the past three weeks, two local residents have won the nation's most publicized literary prizes: Mary Lee Settle the National Book Award for Fiction for her novel "Blood Tie," and James Alan McPherson the Pulitzer Prize for Fiction for his collection of short stories, "Elbow Room," which was also one of five finalists in the NBA.

An equally prestigious but less well-known prize, the Rosenthal Award of the American Academy and Institute of Arts and Letters, went to Douglas Day for his novel "Journey of the Wolf." (Day won a National Book Award in 1974 for his biography of Malcolm Lowry.)

Moreover, according to Vance Bourjailly, an NBA fiction judge this year, three other books by Charlottesville writers were under consideration for that award: John Casey's "An American Romance" (which Bourjailly said was the seventh book on the list), Peter Taylor's "In the Miro District" and Day's book.

No other year in recent memory has found so many prizewinners and potential prizewinners clustered in any one place outside New York. Yet if these writers have anything in common besides place of residence and quality of work, it is perhaps that, prizes asides, their names are not quite household words - in Charlottesville or elsewhere.

On the day, she received the National Book Award for Fiction, Mary Lee Settle sat in the Algonquin Hotel, once New York's most famous literary gathering place, and said with a trace of bitterness, "Once I would've said, 'It's all right, it doesn't matter.' Well, it's goddam not all right!"

What is not all right is that although "Blood Tie," which won her the NBA, is Settle's ninth book, it had a first printi ng of only 4,000 copies and received very little attention. The reviews it did get were largely favorable, including one by Anatole Broyard in The New York Times, but "the overwhelming reaction was silence."

So it was no surprise to Settle that the announcement of her winning was greeted with, well, surprise. What hurt, though, was "a certain viciousness" about it, the press, for the most part, "either ignoring the award or being bad-tempered about it." Even before the announcement, there had been criticism of the nominations, particularly from publishers Aaron Asher and Roger Straus of Farrer, Straus and Giroux, who had publicly reproved the judges for omitting such writers as Walker Percy, John Cheever, Philip Roth and Joan Didion, exclusions that they blamed in some cases on a directive from the NBA sponsor, the Association of American Publishers, that previous winners not be considered. The fiction judges - Vance Bourjailly, Robert Kirsch, and Maureen Howard - defended their choices, however, saying that, although they refused to discuss specific inclusions or exclusions, their "only consideration was excellence." And so it went.

Criticism aimed directly at Settle remained mostly unspoken, but there were indeed plenty of raised eyebrows in New York during NBA week. Yet it seems likely that most of the critics had not read "Blood Tie." In an article in which he noted that the audience at the NBA ceremonies was "universally impressed with Settle's presence and eloquence" in accepting the award, Digby Diehl of the Los Angeles Times also reported that a survey of the 20 members of the executive board of the National Book Critics Circle revealed that only two of them had read Settle's novel, a situation that might account for the book's not having been considered for the NBCC's award given in December. And last week, Theodore Solatoroff, founding editor of American Review and now an editor at Bantam Books, defended Settle to an audience at the PEN Club, New York headquarters of the international writers' society, saying that she had been "writing one distinguished book after another" only to be the recipient of "malice and pettiness" from the New York literary world.

Both silence and grumblings are due in part, Settle thinks, to the literary establishment's "anti-southern bias, a reaction to the lavish praise that used to be heaped on Southern writers whether what they wrote was any good or not." She also blamed the American public's attitude toward writers, an attitude that values personality over achievement. "But I think that my winning this award shows that one no longer has to make a choice between 'being a writer' and writing books," she said vehemently. "There are a lot of writers out there who've been given hope, who've been encouraged by seeing that the closed, malicious literary establishment is closed no more."

It's an issue she addressed in her NBA acceptance speech, stressing that, "If there is an honored region, it is neither North nor South nor city nor country, but the region out of which, good writing must come. Conrad called it the 'lonely region of stress and strife.' I call it left field."

Mary Lee Settle is intimately acquainted with left field, and, she makes it clear, she is not one to feel victimized. There is a certain gritty toughness about this sandy-haired woman with the bearing and bone structure that speak of good breeding, with the husky voice whose decidedly upper-class accent shows evidence of 12 years in England. It's the same spirit that led her to drop out of Sweet Briar College to join the British WAF in 1942; that led to say in 1968 that if Richard Nixon was elected president she'd leave the country, and mean it; that prompted her to reply to a Hollywood producer's comment that "We use writers like Kleenex out here," with "Well, this time you got the Irish linen mixed up with the Kleenex," thereby losing a chance to write the screenplay for the sequel to "Gone With the Wind."

It would probably never have worked out anyway, she laughed, because "my historic sense of the South is not very romantic." Settle is not, strictly speaking, a southern writer at all. "Blood Tie," in fact, is set in Turkey, the story of the destruction brought by rootless American and European expatriates to the old sea-coast city of Ceramos, but the novel embodies conflicts that Settle has dealt with before, conflicts between old and new cultures, between the haves and the have-nots, those with power and those without. Before "Blood Tie," she was perhaps best known for the novels known as "The Beulah Trilogy" - "O Beulah Land," "Know Nothing" and "Fight Night on a Sweet Saturday." The setting is Appalachia, the part of the South that Settle, a native of West Virginia, knows well and which she calls "genteel Appalachia, or I should say, paranoid genteel Appalachia, that region where a lot of 'the best people' in West Virginia, Virginia, Kentucky, Tennessee and North Carolina grew up, but don't like to call it by that name."

The difference between Appalachia and other parts of the South, Settle said, "is one word - coal," a fact that makes the gulf between cultures, between haves and have-nots greater there, and Settle's sympathies are clearly with the have-nots. She is currently writing a novel about the West Virginia mine wars, and she holds strong convictions about the justness of the recent miners' strike and "the paternalistic attitude" of the mine owners.

Such political beliefs might make conservative Charlottesville, a city full of both old and new money, a difficult place for her to live, but one of the reasons she chose to live there is that she had old friends there, people from that "genteel Appalachia" in which she grew up, a group in which "people from Charlottesville and Charleston, W. Va. tended to go to the same schools, the same summer camps, to have friends and relatives in common." Their political differences are not a problem, she said, because, "If I have one deep political belief, it is that democracy is the most revolutionary system in the world, and the essence of revolutionary democracy is that I have to defend to the death their right to speak their beliefs. I can only defend democracy by living it, as mad as hell as it sometimes makes me!"

There is also a "kind of arrogance" about Charlottesville, which Settle likes because it "makes it the center of things." And then there is the well-known southern respect for individuality and for loyalty to one's own, no matter what he or she may do. "Why, sweetie," Settle threw back her head and laughed, "there's never been respect for anything else! I could shout obscenities on the courthouse steps and they'd all just say, 'Why, look at that Mary Lee. Isn't she the funniest thing? You know, she's always been like that, ever since she was a little girl."

That iconoclastic, pragmatic spirit is likely to keep Mary Lee Settle from being to devastated by whatever pearl-handled criticism comes her way. She may, in fact, even find something to enjoy in the conflict. "I've been tempted to bitterness by poverty and neglect," she said, "but never before by fame and fortune, and I can't wait to see what it does to my character."

Before she had time to consider further possibilities, she was joined by Gloria Emerson, NBA winner for her book on Vietnam. In the every elegant and genteel lobby of the Algonquin, they soon harmonize on a duet of "The People's Flag Is Deepest Pink" that broke them up, and Settle offered to teach Emerson a particular favorite. It's called "That Trotskyite Mammy of Mine."