PHNOM PENH, CAMBODIA -- Driving down a tree-lined stretch of Monivong Avenue, the major boulevard of this capital, a Cambodian friend pointed to an empty lot several foreign hotel chains hoped to purchase.

"Will the government sell it?" I asked.

My friend laughed. The government doesn't own it anymore, he said. After the Vietnamese advisers withdrew two years ago, the government privatized nearly all property, and Phnom Penh's real estate market has soared; that empty lot is now worth nearly $1 million. We drove further, past newly renovated villas renting for $2,000 a month to foreigners whose numbers have nearly doubled in the past year.

This unlikely business boom in a city threatened by the return of the Khmer Rouge defies the practical explanations Cambodians offer: that Southeast Asian businessmen, true venture capitalists, are buying into Cambodia cheaply, before a peace settlement when it will be open season for everyone, including the Japanese; that Cambodians are rediscovering how to make money now that the Phnom Penh government has dismantled much of the Marxist economy.

The explanations would make sense if one knew that the Cambodian civil war would end soon. But the Khmer Rouge and its two junior non-communist allies are fighting a war in the northwest provinces, forcing tens of thousands of villagers to flee their homes and threatening a good part of the rich rice harvests. United Nations-sponsored peace negotiations are inching to completion but always seemingly just one step away from collapse.

In Cambodia, few of the pieces fit into one coherent puzzle. At the start of the Khmer Rouge dry season offensive, curfews in the capital were lifted for National Day celebrations and the city partied all night. Amid the festivities, I got caught in several traffic jams.

Of all the reasons for taking the new spirit of confidence in Phnom Penh seriously, however, the most intriguing is the treatment of the foreign community, a bellwether in a country long afflicted with bouts of hateful xenophobia. A major tenet of the Khmer regime, which ruled from 1975 to 1979, was that all things foreign should be eradicated; they not only threw out all foreigners but tried to systematically murder minorities, especially the Cham Muslims. In the 1980s, the Vietnamese occupiers mistrusted foreigners and severely restricted the few foreign aid groups working here.

Those days are over. After the Vietnamese advisers left in 1988 and the occupation force in 1989, the Phnom Penh government opened its doors to foreigners, renting them restored villas, dropping travel and work restrictions and in the process opening up society for their own people. The benefits to Cambodians are many, from earning hard currency in business deals with foreigners to gaining freedom of worship.

One of the best examples of the new openness to foreigners is the return of the Rev. Emile des Tombes. A fluent Khmer speaker, he was one of the last foreigners kicked out of the country by the Khmer Rouge in 1975. None of the Cambodian Catholic priests survived the Khmer Rouge rule, and when the regime last Easter allowed the first public mass in 15 years, it was des Tombes who celebrated it before the 800-member congregation.

In another sign of the changes afoot, the government in December gave the Cambodian Catholics their own church, a former seminary that had been used as a Vietnamese army barracks. The church was consecrated on Christmas Day.

"Naturally, a member of the communist front came to the Christmas Mass and we expected a wooden speech," the priest said. "Instead he said what I would have never dared to say, that a new chapter has been opened for the Catholic Church in Cambodia."

The priest is one of the 80 French citizens now living in Cambodia, quadruple the number the year before. As peace nears, the growing foreign-aid community acts as advance parties for their organizations and their countries which hope, like the Southeast Asian traders, to be on the ground floor when peace comes and the country opens up.

Cambodia remains off-limits to all but a handful of former Soviet bloc countries because of a United States-led isolation policy originally imposed to protest the Vietnamese occupation and now maintained until the Phnom Penh government signs a peace accord. It has not gone unnoticed here that of the five permanent members of the U.N. Security Council who drew up the peace draft, four are allies of the rebels trying to overthrow the government.

Given those odds, the regime has decided its only hope of surviving long enough to negotiate an acceptable peace accord lies with the foreigners. So the regime is doing everything from supporting the U.N. peace plan to giving the International Committee of the Red Cross (ICRC) free rein to trace divided families, a proposal first made in 1979 and agreed to only last year.

In an interview, Prime Minister Hun Sen told me: "We have every reason to trust the peace process to find a political solution." This was echoed in interviews with Defense Minister Tea Banh and Foreign Minister Hor Namhong, who said, "I think peace can be realized in the next three or four months."

"The government is planning for peace in the next six months," said Lajos Tamas, the Hungarian ambassador, who has served here nearly three years. "They {government leaders} are doing just enough to get by, not raising taxes, not making any new enemies . . . . The push and pull in the political arena is less ideological and more a question of whether they can trust foreigners."

Among the foreigners they seem to trust the most is Secretary of State James A. Baker III, whose statement last July dropping support for the Khmer Rouge-led coalition at the United Nations was mentioned by everyone from the prime minister to longtime Cambodian journalist friends as a reason why the U.N. peace plan is looked on favorably.

The country's very ability to survive until peace now depends on foreigners. In December the East European nations and the Soviet Union officially ended their decade-long aid program to Cambodia that accounted for 98 percent of the national budget. Yet there is no rationing here. The restored central market opens at 6 a.m. every morning, the stalls beneath its dome filled with salted fish, imported thermos jars and Thai T-shirts -- thanks to the open-throttled trade with Southeast Asian neighbors that keeps the economy moving. The social welfare programs of the foreign-aid organizations work on the other side of the spectrum, caring for the poorest.

In a burst of rhetoric, Hun Sen said: "I say this as a Buddhist devotee, we consider them {foreign-relief organizations} as our gods . . . helping all the families of Cambodia, even my own."

In a country that was never given aid to rebuild after the Khmer Rouge holocaust, and where one of every five children dies before the age of five, the approximately $36 million of aid from these groups constitutes most of the government's welfare budget. Foreigners help everywhere. The list is long: everything from providing artificial limbs for some of the 600 Cambodians each month who lose a limb to Khmer Rouge mines, to digging wells and providing food in the camps that house 145,000 refugees from the civil war.

Remarkably, this foreign presence has grown even though the country has seemed most at risk following the Vietnamese troop withdrawal. Even though "we were all very nervous, we learned how to cope," said Margaret Morris, a nutritionist who lives here with her husband Peter and two small sons. Now, less than two years later, the family has moved into an exquisite home, joined the swimming club at the Cambodiana Hotel, and helped found a modest international school for English-speaking children in the capital.

The French, on the other hand, have opened an entire Alliance Francaise, one of the best examples of how foreign governments are dancing around the U.S.-enforced ban on official relations by foreign governments with the Phnom Penh regime. French activism is matched by the Australians, who plan to open a trade mission this April, adding to its consortium of government-funded aid groups. In December, at the strong lobbying of former prime minister Pierre Elliot Trudeau, Canada opened its own government-funded aid consortium.

The more discreet Asian business community is not far behind. A visitor learns quickly which Thai, overseas Chinese, Singaporean and, it is hinted, Japanese groups are secretly negotiating with the government for licenses to open up private companies and banks, and increase trade.

Their local partners are newly wealthy Cambodian entrepreneurs who owe most of their success to their own carefully-cultivated ties to the government. The regime is run by a group of interlocking clans, which gives far more of a feudal than a Marxist feel to the country and the way the regime conducts itself. Hun Sen told me that private businessmen are patriotically helping the government by buying oil abroad with their precious hard currency and reselling it to the government for the local soft currency, the riel. The additional oil is used to fuel the army and fight off the Khmer Rouge. Right behind the patriotism is profit: With their bundles of oil-sales riels, the businessmen buy rice from peasants and export it for hard currency.

The United States has also joined the rush to get into Cambodia on the ground floor but in a decidedly old-fashioned way, by creating a small "liberation zone" inside Cambodia near the Thai border to win the hearts-and-minds of the peasantry against the Phnom Penh government. The U.S. Agency for International Development (AID) has spent more than $20 million on this small non-communist rebel zone, building a 21-kilometer surfaced highway and five concrete hospitals; training some 7,000 Cambodians as blacksmiths, teachers, carpenters and farmers to work in the zone, and providing free food and medicine as well as school supplies for 13,000 students.

The project has pitted foreigner against foreigner. The Phnom Penh offices of the U.N. High Commission for Refugees and the ICRC consider this the greatest infraction of the United States' own developmental aid embargo and the agreements made at the Paris peace conference to coordinate aid and programs through the U.N. agencies or the members of the Paris Conference on Cambodia.

"Our biggest issue is what the Americans are doing inside Cambodia," said Marco Cabassi, the representative of the U.N. High Commission for Refugees in Phnom Penh. "It undercuts our repatriation plans and it is not helping us to protect refugees. There is no good use for it in any of the plans for peace."

The ICRC has appealed to the United States to stop the program, which Bertrand Kern, ICRC director in Cambodia, says could "turn the country into a Lebanon." Americans counter that this is "resistance" relief work until there is peace.

One thing is certain: The battle for foreign sympathy has just begun.