A cleverly contrived and sweetly realized romantic fable, "Atlantic City" -- opening today at area theaters -- creates a mood of whimsical enchantment within an authentic setting that also suggests a state of mind. The real place -- a decaying mobsters' resort now in the process of becoming a legitimized gambling mecca -- is exploited for savory comic and sentimental possibilities by writer John Guare and director Louis Malle.

A boom town in dramatic architectural transition, Atlantic City serves as a ready-made theatrical backdrop, representing a place in the sun where opportunity beckons and fortune may smile on even obscure fortune-seekers if they're daring enough to capitalize on a piece of the action. Like the setting, the characters are eccentrically funny: distinctive and engaging but no better than they should be.

"Atlantic City" seems to owe its fundamental comic charm to Guare's ability to invest his characters with a beguiling blend of wistfulness and absurdity. The movie revitalizes the tradition of Damon Runyon. Guare's flair is most evident in the dialogue, which orchestrates similar notes of delusion, longing and regret in a wittily differentiated group of personalities and voices.

For example, Kate Reid as Grace, a pampered and bossy hypochondriac, the widow of a gangster called Cookie Pinza, may suddenly confide, "I always wanted shoes with clear plastic heels you could see through . . . with goldfish swimming around in them." Burt Lancaster as Lou, her elderly errand boy, scapegoat and sometime lover, waxes nostalgic about the mob-controlled spa of 40 years earlier, telling a young crook that "the Atlantic Ocean was really something then" and deploring the new casinos going up around him. "They're too wholesome for me," he insists. "Tutti-frutti and craps don't mix."

Guare has a delightful way of sneaking thematic significance into funny remarks. Lou may grumble about it, but tutti-frutti and craps almost certainly will mix in the Atlantic City of the future. The contradictions that offend Lou are a source of profound comic satisfaction to Guare, who regards them as grounds for optimism, humorous signs of newal.

Lou takes a special interest in a young woman named Sally (Susan Sarandon), a refugee from Moose Jaw, Saskatchewan, who envisions Atlantic City as a steppingstone to prosperity and class. For the time being she works behind the oyster bar at Resorts International, but her dream is to deal her way to a casino in Monte Carlo. Sally and Lou inhabit neighboring apartments in the same condemned building. Grace resides on the floor below, summoning Lou by bell whenever she needs something.

Lou's living-room window faces Sally's kitchen window across a narrow alley. He has gotten into the habit of peeping: The movie begins as he watches her perform a peculiarly stirring private ritual, cutting up lemons and massaging the juice onto her arms, shoulders and breasts. Guare's wit extends to such mysterious illustrative details; eventally we discover that the ritual that looks so erotic means something quite different to Sally.

A frustrated gallant, Lou gets an opportunity to approach the object of his affection when Sally is imposed upon by an unwanted guest, Robert Joy as her good-for-nothing estranged husband, Dave. He has another member of the family in tow: Hollis McLaren as Sally's kid sister Chrissie, a stalwart flower child expecting a baby fathered by the shameless Dave, who has also stolen a packet of cocaine that he hopes to sell in Atlantic City.

Dave's attempt to outsmart the criminal element doesn't pan out. In the aftermath Lou imporvises a scam of his own and makes himself useful to Sally. Taking messy practical matters off her hands, he begins playing the helpful, commanding male role that a lifetime of loyalty to Cookie and Grace evidently denied him.

The same thugs who found Dave come looking for Lou and Sally. Lou talks as if he can handle himself, and his chivalrous intervention on Sally's behalf is sincerely touching, but can he really protect her from ruthless tough guys? Guare plays his cards so skillfully that even Lou seems surprises at himself.

The most satisfying single aspect of the film is Lancaster's performance. It's a disarmingly beautiful characterization, an elderly grace note to an exceptional starring career. Lancaster has always been a phenomenally appealing and eloquent physical presence. He has also been more willing to test his range than any other Hollywood star of his generation. He seems an unlikely choice for a small-time time-server like Lou, but his size and grace end up enhancing the pathos of Lou's situation. Lancaster is at once believable and endearing as this rather cowardly old lion who gets a chance to prove himself as nature would seem to intend and honor clearly demands.

The characters and episodes are so smartly formulated that Malle doesn't need to force the comedy. He keeps a discreetly observant distance, allowing the performers to interact and the settings to reinforce their scheming and dreaming. Guare is the composer and Malle the astute conductor in this melodious collaboration.

The erratic Sarandon has her most appealing role yet as Sally, a skittish type who tends to rationalize similar tendencies in the actress. Kate Reid and Hollis McLaren contribute marvelous supporting performances and Robert Joy makes an impressive debut as the blandly corrupt Dave. In addition, there are excellent bit performanced by John McCurry as a droll black mobster, Al Waxman as a drug dealer who treats Lou with patronizing amusement and Robert Goulet as a smarmy entertainer who sings Paul Anka's hilariously chummy lyrics to a comeback anthem, "Atlantic City, My Old Friend." Guare and Malle express themselves with more sophistication, but in their own way they're also bullish on the future of Atlantic City.