Every February, at the peak of the carnival season, this baroque city reincarnates its fairy tale past. A flurry of pre-Lenten costume parties, often held in ornate palaces redolent with history, transports people back to an era of hedonism and glory, when Metternich turned Vienna into the social and diplomatic capital of Europe. The fantasy reaches its climax with the opera ball, when the men don white tie and tails and the women their most resplendent gowns to waltz through a glittering night at Vienna's majestic Staatsoper.

Basking in the glow of this year's gala at the opera was Helene von Damm, the 46-year-old American ambassador whose remarkable evolution from poor Austrian farm girl to Ronald Reagan's secretary and finally envoy from the world's most powerful country has fascinated and captivated the Viennese since her arrival nearly two years ago.

But if the Viennese like to indulge in nostalgic reverie and Horatio Alger stories, they absolutely thrive on gossip. In that domain, ever so treacherous for a diplomat, von Damm has stepped into a more unwelcome spotlight, tarnishing the pristine image of an expatriate Cinderella.

Early last month, she shocked fellow diplomats and delighted social mavens by taking her fourth husband, marrying Peter Guertler, the 39-year-old owner and manager of the Hotel Sacher, renowned for its aristocratic clientele and rich chocolate cakes. Her previous husband, businessman Byron Leeds, returned to New Jersey in January after their divorce.

"And we thought they were happy!" proclaimed a breathless headline in an Austrian tabloid.

Her marriage to Guertler, in a quiet ceremony in traditional Austrian costumes at the posh ski resort of Kitzbu hel, unleashed a torrent of talk in Viennese coffeehouses and on the diplomatic circuit about Guertler and speculation about Von Damm's marrying up the social ladder.

Last week, a column in The Guardian newspaper in Britain said that "it is considered unusual for ambassadors to marry locals and since the lady is not a career diplomat but a political appointment, it was assumed that she might be recalled. That she has not been is thought to owe something to the 'Nancy factor,' " apparently a reference to Mrs. Reagan. Yesterday, the White House said Mrs. Reagan had no comment.

While some ambassadors would be aghast to find their private lives embroidered with sensationalism, von Damm has shrugged off any embarrassment with cheerful aplomb, perhaps secure in the knowledge that her long association with Ronald Reagan will defuse any controversial reports in Foggy Bottom.

"Wherever I seem to go my picture ends up in Gesellschaftsspalten society columns in the papers because, for better or worse, I have celebrity status," she said, relaxing over tea during an interview in her office. "I think it partly has to do with that I am sort of a known quantity in town and I have a personal relationship with many of them.

"There's only one other woman ambassador in the diplomatic community and so, when I am with fellow diplomats at a social event, whose picture is in the paper? Usually mine."

With some reluctance, she explained that her recent divorce was due to her former husband's desire to get back into business for himself rather than continue to play the role of diplomatic consort.

"Byron was extremely secure, but I think he missed being involved. We often have this dream of retiring at 50 -- until we do it. Soon his traveling back to the States became more frequent and we grew apart . . ."

Her popularity does not appear to have suffered from the flap over the sudden marriage or the two recent divorces. A Marine guard, carrying a floral bouquet from some admirer to the ambassador's office, casually notes that "this sort of thing happens six or eight times a day."

Von Damm and her staff readily concede that her Austrian background has stimulated curiosity in her and how she rose to such a prominent position. "I can't tell you how many people come to me and say how great my story is and that they did not think it was possible anymore in America," she said. "So I think I represent the fact that opportunity still exists in the United States today.

"As an Austrian I could not have done the same thing. It's a much more rigid society. My scholastic background is practically nil, I don't have a university degree. I am convinced that if I had stayed in Austria I could not have become even secretary to the regional governor in Tirol.

"But in America, the question was always: Can you do the job, how do you apply yourself? Nobody ever asked me for a piece of paper . . . I was living in Illinois, I just happened to fall in love with Ronald Reagan and his politics. I wanted to be part of his campaign in California, so I went out there and knocked on doors and was let in. And in 18 months I was his private secretary. Everybody was terribly supportive; they enjoyed seeing an immigrant picking herself up and getting ahead."

As a young girl growing up in the Soviet-occupied sector of Austria, she recalls the killings and rapes of close friends that left a deep impression.

"I learned at an early age what freedom was all about," she said. "There was no real discipline and, you know, an army is an army when you let them loose."

She moved to Germany, married an American GI and resettled in Detroit. After a couple of broken marriages, she found a cause in life by linking up with Reagan and his nascent gubernatorial campaign.

"I always joked with Reagan that I picked him, he really didn't pick me," she explained. "You see, the reason he was so attractive to me was precisely because I am European, because I know that socialized medicine or what have you takes away from individual freedom. What he said, about less government, more free enterprise, made sense to me."

Von Damm admits she serves primarily as Reagan's representative because of their close personal ties, but she also believes a political ambassador can build "a good marriage" with career diplomats.

"They are probably surprised or maybe not always totally comfortable because I conduct myself somewhat differently and do have other ideas, but we have a 'give and take' in that I always encourage them to be frank and always speak their mind."

She dismisses any notion that her appointment could be compared to that of the vacuous lady envoy popularized by Ethel Merman in "Call Me Madam."

"If you look at my schedule, if you compare it with other ambassadors', I would make a bet that I have done more substantive things and fewer social things than all the others," she said.

"I've been in the political world for 20 years. I'm not antisocial, but it gives me no particular pleasure to go out every night to some social event. Because I am political enough, I weigh very carefully where I go. There has to be some rhyme or reason. I don't just go out for a meal."

Von Damm is proudest of bringing to bear her keen political instincts, honed during her years with Reagan, in ways that can help her former homeland. One American technique she has employed for good causes in Austria has been the fundraiser.

She organized a Frank Sinatra charity concert in Vienna that earned $200,000 for needy Austrian children and a dinner that raised more than $15,000 to refurbish the Sigmund Freud museum. "I just applied the method used before in campaigns ," she said. "I formed a diverse committee of 15 illustrious Austrians, where each member agrees to take so and so many tickets. Whatever you don't sell, you have to buy."

She hopes to serve out the second term of the Reagan administration in her Vienna post and then seek some kind of business position that will prove compatible with the life style of her new husband.

"Sooner or later we learn we cannot have it all, that we have to make choices," she said. "You come to the conclusion that something has to give -- do I want a high-powered career as chief executive officer, or is it more important to have a quality private life, with a husband and a home?

"I'd like to strike a balance, because I don't want one at the expense of the other."

She would like to divide her time between Vienna and New York, where her campaign days reaped several close friendships in big business circles, notably with construction magnate Donald Trump.

But she has no preconceived plans about what kind of business she would like to enter. "I like to think of myself as serendipity, I don't like to lock myself in. I've always found that's what makes life interesting and fun."

Then, thinking about her husband's line of work and her enthrallment with the Big Apple, her mind begins to churn out an intriguing proposition.

"Maybe we'll build a hotel in New York. Peter already has gotten offers from other countries asking about starting up Sacher coffeehouses. In his cake there is lots of business, and in New York, one of those big stores, maybe Bloomingdale's, with those gourmet things, may be interested in his cake."

With a wave of her hand, she dismisses the brief fantasy and returns to her present role. "But that's too far into the future. I've always found something to do, so I'm not worried about my afterlife."