"New York is just a trading post," said novelist Mary Lee Settle. "You pack your skins together and load them on your back and trek into the city. You stay awhile, you bargain and after the bargaining is over, you get drunk. But then you leave; you go back into the country to get more skins. This is a country boys' revolution, and it will continue to be a country boys' revolution."

It was Saturday night in an elegant 18th-century drawing room of the Colonnade Club at the University of Virginia. If the atmosphere was "country," it was that of the landed gentry rather than the dirt farmer. But Settle had just declared war (a limited, literary kind of war) on Manhattan, and her conversation hovered over the metaphor of the writer as a trapper living in the wilderness.

The formal declaration of war had come an hour earlier, during the ceremonies for the first annual presentation of the PEN/Faulkner Award for Fiction. The scene was the Dome Room of the university's Rotunda building, a handsome, circular hall designed by Thomas Jefferson in a classical Roman style.

"There are people who think we are down here having a party," she said. "We're not. We're down here having a revolution -- a perpetual revolution . . . We are declaring our independence from that little island up north that is just barely inside American territorial limits."

Ironically, perhaps. The first PEN/Faulkner award was received by a New Yorker, Walter Abish, for his novel "How German Is It." But Abish (who lectures at Columbia University) joined in the ceremony as an organized protest by American writers against the "subtle tyranny" of the publishing marketplace. So far, he said, his books have "in the marketplace . . . no significance at all. I do not underestimate the marketplace. I have a lively interest in it. I take it into consideration. But I do not expect it to leave any lasting literary impression on our time."

In some foreign countries, Settle said, the tyranny over writers is obvious; "if you step out of line, you go to jail." In America, the tyranny is less evident. "We can print anything we want, so long as someone will publish it. The tyranny here is a tyranny of commercialism, of indifference to quality, a tyranny of literary fads and fashions."

The PEN/Faulkner Award is sponsored by the national and Southern regional chapters of PEN, the international writers' organization. It differs from all other literary awards in this country because it is completely administered by American writers. According to Thomas Caplan of Baltimore, who organized much of the funding for the first award, the money came "mostly from writes and a lot of small foundations."

"This is the first time that we writers have gone into our own pockets for an award," Settle said. "So we must feel strongly about it."

The PEN/Faulkner Award began as writers' reaction to the death a few years ago of the National Book Awards (for which writers were allowed to select the prize-winners) and the substitution last year of The American Book Awards (TABA), financed and controlled by the publishing industry, which provoked widespread protests among American writers. "I would not accept TABA if I were offered it," novelist Ann Beattie said at the PEN/Faulkner reception. "I refused to let my publishers enter it."

Also at the reception was Aaron Asher, an editor at Harper & Row who was one of the leaders of the opposition to TABA last year, in which more than 40 distinguished American writers refused to have their books entered for the prize. "I still haven't given up on TABA," he said. "This year, it will not be quite as odious as it was last year. What we have to do is find a new equivalent for the old National Book Awards, which had a better record than the Nobel, a better record than the Pulitzer, for recognizing quality."

"What TABA has done," said Settle, "is trigger the writers into doing it for themselves. The NBA was given, through the years, to a total of 32 novels, and 30 of them are still in print. John Updike, Philip Roth, Walker Percy, Bernard Malamud and Saul Bellow were all practically unknown before they won the NBA. That's the kind of record we want to establish with the PEN/Faulkner Award."

Although the award is still financially insecure, its sponsors hope eventually to raise the amount given from this year's $2,000 to $15,000 for the winner and $1,000 for each of the finalists. For the first awards, the benefits will be largely confined to prestige and publicity. Abish said that he plans to get a new typewriter with his prize. The winner and runners-up ("The Transit of Venus," by Shirley Hazzard; "The Second Coming," by Walker Percy; "Aberration of Starlight," by Gilbert Sorrentino, and "A Confederacy of Dunces," by John Kennedy Toole -- which was published posthumously and has just won the Pulitzer) -- were publicized by the PEN/Faulkner committee in an advertisement. "A lot of publications ran that ad for nothing," said Settle; "The New Republic, The Nation, The New York Review of Books, Publishers Weekly and the New Yorker, but we had to raise over $3,000 -- more than the amount of the award -- to put the ad in The New York Times."

"All of those books were winners," said prize-winning novelist Tim O'Brien, who was one of the judges. "I was moved by Shirley Hazzard; my intellect was stimulated by Walker Percy; I laughed as I rarely do at the work of John Kennedy Toole and I admired completely the artistic intricacy of Gilbert Sorrentino. For that matter, there were many very good books that did not get a nomination -- for example, Mary Lee Settle's 'Scapegoat,' which she graciously refused to allow to be entered."

As a writer whose work tends to take experimental forms, Abish said he has seen recent signs of surrealism in daily life. "Are we learning to read everyday life in a new way?" he asked. "Are we adjusting to it the way we have come to adjust ourselves to what, initially, appeared difficult and problematic in literature? What is this uneasy relationship between everyday life and the contemporary American novel?"

On March 30, after learning of the shooting of President Reagan, he walked into a New York coffee shop where, obviously, no one had yet heard the news. "When the waiter came to take my order," he said, "I mentioned that President Reagan had been shot. He looked disinterested. 'It's possible,' he said. In other words . . . I might not be making it up. . .

"And why not? Why shouldn't it be possible to beleive that a president of the United States who is a former Hollywood actor had been shot by a demented young man who wished, with this act, to prove his love for a young actress, now appropriately a student of writing at Yale, after seeing her in a film in which she performed the role of a teen-age prostitute?"