IN EUROPE, the Telluride, Colo., film festival is a legend.

It's where director Werner Herzog was discovered for America in 1975. It's where Leni Riefenstahl caused a furor by her mere presence (though they yawned at her electrifying hymn to Nazism, "Triumph of the Will"). It's where the great silent film "Napoleon" was projected on a ski slope while its 90-year-old creator, Abel Gance, watched from his hotel window.

"Telluride speaks to us because of its scale," remarked Georg Alexander, a Cologne, Germany, TV producer transplanted to Hollywood. "It's family size. And the scenery is something else."

This is the kind of festival where you see Jean-Luc Godard, a very private person, lounging on the patch of lawn, next to the New Sheridan Hotel, where Keith Carradine chats up a girl over coffee in the Excelsior Cafe, where Shelly Duvall wanders down the main street with her hair in pigtails, talking to Robert Altman and Ronee Blakeley.

Lew Ayres was here for a rare showing of the full 140-minute "All Quiet on the Western Front." Abstract filmmaker Stan Brakhage was here, and Isabele Huppert, the hottest star in France, and Russ Meyer, the king of soft porn. It may be family size, but that's some kind of family.

To understand this very un-Cannes festival -- which completed its seventh season earlier this month -- you have to get the feel of Telluride itself, a one-time mining town with about 5,000 people living in Victorian clapboards behind a false-fronted business district. Mountains careen to the sky on three sides, and down the long valley, sprawl ranches with ponds and grazing horses that come straight off a Saturday Evening Post cover.

It is an environment as fragile as permafrost.The tensions here are obvious to anyone who walks the eight-block length of it. Telluride has become a ski town, and there are those who talk of "the next Aspen." They are just one of the factions.

To start with, you have the "locals," the good old Western country people whose doings and attitudes are nicely summed up in the Marshal's Report in the weekly Telluride Times: "Tom Spyke was convinced not to ride his motorcycle home. He picked up his coil wire the next day . . . A couple of leftovers from the jazz festival were told to move their camps from near the river . . . Mark Montgomery and Laura Waltz were issued citations after vehicularly contacting one another. . . ."

Then there are the developers. Almost everyone talks like a developer. Nearly every house in this budding ski resort is being rebuilt, it seems, with octagonal windows, eccentric turrets and bays in varnished clapboard, solar greenhouses, woodstoves and hot tubs.

The prices are a local scandal. For a three-bedroom house with a roof you wouldn't let your cat walk across, $177,500. For a really fancy place, upwards of $300,000. Many miner-built homes don't even have foundations. Condos are rising everywhere. Town Hall has requested that all carpenters register so a list can be made for builders. Building permits so far this year total $4 million, compared with $3.4 million for all of last year. Retail sales were up 123 percent.

Muttered a wrangler who's had a real-estate license for 20 years, "Back then, I coulda bought the whole town for $100,000."

Add to this mix three other kinds of people, all young and blond and beautiful: the old-fashioned hippies, today's gypsies with their battered campers full of blankets and wide-eyed children shy as deer; the thrill riders who start with the Telluride Plunge, as unrelieved downhill ski run hair-raising to look at even in summer, and move on to heli-skiing and hang-gliding; the rich kids living on trust funds who may cling to any of the other factions, or may simply hang out.

And there are the tourists, who find the place even though it's on a deadend road in a box canyon. Ouray, a platic honky-tonk that has the nerve to call itself the Switzerland of America, is the nearest town, 18 miles by jeep trail or marathon run, 49 miles by highway, 6 miles by crown.

In winter, Telluride is so crowded it has to have no-parking signs on its unpaved back streets. In summer, it drums up business with the jazz festival, the hang-gliding competition (they swoop down from between the peaks on the still evening air, and everyone stops in their tracks to watch, even the stoned hangers-on at the Last Dollar Saloon).

And the film festival. Founded in 1974 by Bill Pence, a Denver theater owned who bought and restored the old opera house in partnership with archivists James Card and Tom Luddy, it was a labor of love that over the years turned into a first-rate proving ground for new pictures and a chance to rediscover lost genius.

This year it was big on retrospectives, notably a wonderful compilation of film-noir clips and Joseph H. Lewis' "Gun Crazy," an overlooked masterpiece with John Dall and Peggy Cummins. Lewis was there, and everyone robbery. Tight and clipped and crackling, it made "Bonnie and Clyde" look like a TV sitcom.

The rarely seen Hitchcock thriller "Vertigo" was shown, as were many Altman films, along with tributes to cameraman Karl Struss and pioneer abstract animator Oskar Fischinger, the man who dreamed up "Fantasia" only to have Elopold Stokowski take it from him, according to his widow.

Among the new films were Godard's "Every Man for Himself," well ahead of its New York festival screening, Maurice Pialat's "loulou" and the controversial Soviet non-realist film, "The Mirror." Krzystoz Zanussi's new picture, "Constant," never made it to town, causing renewed complaints about the state of Colorado's neglect of this international event. A helicopter could have brought it from Denver in no time.

Other irritations were poor projection at one of the three theaters and an outrageously bad print of Godard's "Vivre Sa Vie," faded almost to a blank, with so many splices that it broke down 17 times in the first half-hour. The distributor, Cornith Films, was taken to task for not scrapping it long ago.

There probably weren't more than 200 people at the four-day festival, including film directors and actors from all over the world, exhibitors and distributors looking for new ideas, critics, Hollywood fringers and couples from places like Omaha and Tucson who run film societies.

On the last day we all took the frightening ski lift to the mountain top for a picnic. And that night, punchy with films, we wound up at the Icehouse restaurant watching a jiggly 16-millimeter projected on the wall: Les Blank's hilarious picture of Werner Herzog eating his shoes and, finally, a film lovesong to garlic, during which the management filled the place with the smell of frying garlic. For once, everybody was movied out.