MOVIES WITHIN movies within movies tangle in the brilliant screen adaptation of Manuel Puiz's "Kiss of the Spider Woman," with the hypnotizing William Hurt as a deceptive homosexual at the center of the web.

Hector Babenco, like the author an exiled Argentine, directs this gripping and disquieting prison drama co-starrring Raul Julia, who's superb as Hurt's straight cellmate in a grim Latin American jail.

Julia is at his best as a pious, political prisoner, and Hurt won a prize at Cannes for his role as an effeminate romantic who entertains his cellmate with fanciful descriptions of his favorite movies and other elaborate tales. Sonia Braga, the beautiful Brazilian star, is the heroine of the movies-within and the movie without, appearing as Julia's real- life girlfriend, the sensual Spider Woman, and most effectively as a French chanteuse in a Nazi propaganda film.

This is a complex, multi-layered screenplay by Iowan Leonard Shrader (the brother of Paul), who overcame a predilection for stoic American heroes to successfully develop the film's distinctive characters, the nurturing gay and the macho revolutionary.

In the beginning, the two men have nothing in common really, except their social persecution, and nothing to offer each other, except themselves, and this they give. "Spider Woman," among so many other things, is a love story. If you are squeamish about the prospect of a love scene between the two men, there is only the enigmatic kiss. On the other hand, it is a verbally explicit film.

Most of the story takes place in the cell, where Hurt entertains Julia with his films and eventually changes Julia's harsh outlook with superhuman concern and kindness. The two grow beyond their narrow roles in a setting so intimate it's as if we were eavesdropping.

Babenco, who also directed "Pixote," handles it comfortably, moving from style to style. Additionally, he introduces dreamy and highly stylized black-and-white footage to clearly differentiate fantasy from reality in the internal movies. And with it, he creates a comical, B-movie parody, later ending with a salute to the optimism of Hollywood movies in the '40s.

Like "Purple Rose of Cairo," the filmmakers wonder at the effect of movies. Sometimes that gets a little much, as when Hurt declares, "I don't explain my movies. It ruins the emotion." That, an overlong ending, and some curious scenes in a dreary gay bar are all that mar the otherwise marvelously crafted film.

KISS OF THE SPIDER WOMAN (R) -- At the Circle West End and MacArthur.