More than 50 people gathered in the middle of Dupont Circle Saturday night and joined hands to create what they called a "Fairy Circle" -- a "good, safe place where people can be who they are," one participant said.

They were part of a group of an estimated 100,000 gays who converged on the city over the weekend for a series of demonstrations, and -- as was the case Saturday night -- a lot of fun. In Dupont Circle at least, the "straights" seemed to become the minority.

"We've essentially taken over the city. We're everywhere," said Wil Smith of Seattle.

Case in point: As traffic snarled to a standstill on nearby P Street NW, two groups in two cars traded curses in the grand Washington tradition. But one passenger got the better of those in the other car when he yelled, "You must be heterosexuals," to the enthusiastic cheers of scores of nearby pedestrians.

Dupont Circle, normally relatively quiet on Saturday, could have competed with the congestion of Georgetown this weekend. "I've never seen anything like this before," said Cheryl Spector of Washington, who was staffing an information booth for the myriad out-of-towners strolling along Connecticut Avenue.

"There's been a line outside since 10 this morning," said Deacon Maccubbin, coowner of Lambda Rising, a well-known gay bookstore at 1625 Connecticut Ave. NW. "It has been a madhouse, a wonderful madhouse," he said Saturday night.

The air in this part of Northwest Washington was decidedly festive, with throngs of gay couples openly displaying affection. "People are a little more loose in this atmosphere," Smith said. "There's not anything wrong with people displaying their emotions in public. Straight people do it all the time. I'm here to watch all these men."

As far as many local merchants were concerned, the free-spending crowds could do as they pleased. "It's been a lovely day," said Beth Hawks, a street vendor who sells jewelry on a regular basis near Dupont Circle. Hawks said she did three times the business that she normally does on a Saturday. "There have been no hassles. It's a real high-energy crowd," she said. "I'm excited about what they're doing here."

Police, too, said the large crowds were posing few problems.

Despite the festiveness, people such as Bob Kunst of Miami served to remind others of the serious undertone of this weekend's activities. The director of Cure AIDS Now, Kunst said he believed that at least two-thirds of the revelers on Connecticut Avenue Saturday might test positive for the AIDS virus.

He criticized the organizers of this weekend's march for focusing on discrimination instead of solely addressing the epidemic. "An estimated 100 million people will be infected in five years," he said, "and there's not an ounce of a feeling of emergency from {President} Reagan on down . . . . This is a health care crisis."

To prove his point, he began randomly asking passers-by if they knew anyone who had died of AIDS. A quick pall came over each person's face. Everyone had lost someone.