Shortly after six o'clock on a recent evening, Alfonso Navarro Olveido, 33, a Catholic priest, was sitting in his home reading when four masked gunmen walked in and killed him with seven bullets.

News of Navarro's murder was all but ignored by San Salvador's two leading newspapers, whose front pages the next day were filled with accounts of the burial of Salvadoran Foreign Minister Mauricio Borgonovo. Kidnapped three weeks earlier by leftist terroists, Borgonovo was found dead after the government failed to comply with the kidnapers' demands.

There is little doubt that the second murder was retailiation for the first. It was confirmed in a communique from a clandestine rightist group called the White Warriors Union, which blamed the church for encouraging terrorists and warned that priests would be punished if Borgonovo were killed.

The murders have left the Roman Catholic Church and the rightist military government confronting each other across well-defined battle lines in this small country, a microcosm of the political, social and economic problems of much of Latin America.

El Salvador, as its citizens never tire of reminding visitors, is an extremely small country - smaller than Massachusetts - with more than 5 million people trying to eke out a living on its humid volcanic slopes. There is no elbow room within its crowded territory, and no action goes without a reaction.

The government has imposed a state of siege, and as one businessman said, "There is going to be some serious repression here."

After years of being ignored by the world press, quiet El Salvador is experiencing what it meant to became an international "trouble spot." Headlines describing the murders were followed by a drastic decrease in tourism - one of the country's biggest money earners.

Cancellations flood incoming telephones lines, and a June meeting of the governors of the Inter-American Development Bank - a total of 1,600 visitors for which the country built a convention center and hundreds of motel rooms - has been transferred abruptly to Guatemala.

"It's like owning a restaurant where botulism is discovered," moaned Alejandro Gallard Prio, director of San Salvador's convention and visitors bureau.

Much-needed foreign investment is expected to dry up.

The actors in El Salvador's drama include a small, wealthy economic elite that owns the country's profitable coffee farms and light industry. Allied with the elite is its handpicked, military-dominated government. Like many Latin rulers, they view every perceived threat to the status quo as evidence of incipent Communist takeover.

Contributing to this fear are increased rumblings of discontent from landless peasants whose plight recently has been discovered by the Catholic church. After years of admited alliance with the elite, the church has developed a conscience and thus has become a suspected supporter of alleged Communist subversion.

Rounding out the cast are extremists on both ends of the spectrum - Marxist terrorists and rightist vigilantes, suspected of being the "hit men" for more respectable groups.

Although no evidence has been presented to link the terrorists to any outside force, most of the government and economic elite believe otherwise. There is a professionalism about their operations "that was not acquired locally, but probably from Cuba," one business leader said.

Similarly, the Catholic Church is widely beleived to be at fault.

"The right believes that the style of the new priests has pushed young men into the arms of the guerrillas, that the priests planted the seed," one priest said.

The Slavadoran cauldron began to simmer more than a decade ago, when young priests life Navarro began to preach to the peasants Pope John XXIII's gospel of social justice."

In 1967, Navarro, newly graduated from a local seminary, arrived at his first rural parish. Dressed in peasant clothes, his hair long, and wearing sandals, he like many other young priests in Latin America, "spoke a new language from the pulpit," one church official said. He told the compesinos (peasants) that God intended all men to be equal - including priests, compesinos, and property owners.

"It was a shock," the official said. "The peasants didn't know what to think."

The idea that peasaants should think at all made many in the elite nervous. El Salvador's ruling class lives in fear that hordes of machete-wielding peasants will some day wake up, organize and take their share of the country's riches.

As the priests became more militant, and the rulers more nervous ans outraged, the two groups polarized themselves increasingly.

Last January, National Tourism Director Roberto Poma, a scion of one of El Salvador's ruling families, was kidnapped and killed by a terrorist group describing itself as Marist, the elite and the government suspected the priests of aiding, abetting and perhaps even getting the terrorists.

A few weeks later, Father Rustilio Grande, an activist Jesuit, was shot in the head by unknown assassins. In response, Salvador's archbishop, Oscar A. Romero, shut down parochial schools for three days, canceled all Catholic masses except in the main cathedral, and announced that the government unless the murder was thoroughly investigated.

All the while the country was in political termoil. In the Feb. 20 presidential election, Gen. Carlos Humberto Romero was chosen to replace Col. Arturo Armando Molina. Both are members of the conservative National Conciliation Party that has held power since 1962. The election was declared a graud by the opposition, a coalition of Christian Democrats and small leftist parties and the charges were believable enough to spark congressional hearings in Washington.

A weekling, peaceful demonstration held by the opposition in the capital city's main square was broken up by government troops in what is now called "The Monday Massacre." The government reported five civilian deaths; other sources estimated the numbers at close to 100. A similar demonstration on May 1 brought a similar result. Eight persons were reported killed.

Meanwhile, a Salvadoran military operation earlier this week in the city of Aguilares, aimed at dislodging peasant farmers who had appropriated private property, resulted in the arrest and presumed expulsion of three Jesuit priests, two Spaniards and a Panamanian. The government said six civilains were killed.

According to an inquiry being conducted by the Boston-based Unitarian-Universalist Service Committee, at least 200 peasants and actnists are in jail without charge, and many have been tortured.

Of El Salvador's 250 Catholic priests, at least 14 have been expelled during the past year, and many more say they have been threatened.

With the country's two main newspapers even more conservative than the government, the principal opposition voice to the government has been the church's newspaper and radio station.Several weeks ago, church officials said, the government threatened to close the church media if critism did not cease. Last week, the church newspaper's press was destroyed by a bomb.

Leaflets recently distributed in San Salvador, titled "The Church and the Kidnapers," accused the church of imprinted the slogans of various terpictured a bishop on whose robe were rorist groups.

Archbishop Romero has demanded that the government "cease torturing and threatening priests" and control the actions of rightist, anti-Communist organizations.

All of this has been watched closely by the U.S embassy here, which has taken a strong position on human rights and has relayed reports of violations to Washington. A high-level embassy official said, however, that the embassy has requested by has yet to receive State Department support for a demand that the Slavadoran government investigate the disappearance here last fall of a U.S. citizens, James Ronald Richardson, who was arrested for vagrancy.

"We have information that he was taken out and shot by the government," the official said U.S. Ambassador Ignacio Lozano, a Ford appointee, has publicly said that he was received no "believable explanation of what happened to an American citizen in the custody of the Slavadoran government."

The Slavadoran goavernment has expressed and canceled all U.S. military aid.

The embassy official said he would be "the first to admit that what happens in El Salvador is of no importance to the United States," but the lack of U.S. followup on charges of human-rights violations "is known in the rest of Central and South America."

Salvadoran officials, he said, "Are laughing at us."