West German Chancellor Helmut Schmidt called on the kidnapers of industrialist Hanns-Martin Schleyer tonight to "end your insane undertaking" and told the nation: "This state, which the terrorists believe to be impotent,...is by no means impotent."

Schmidt's grim, nationally televised remarks, made before a packed session of Parliament, were aimed largely at the public, whose confidence has been shaken by the failure of police and government to crack the five-month campaign of violence by a tiny but determined band of extreme leftist anarchists that has stunned this country.

With the exception of a new budget presented to Parliament today, the Schleyer kidnaping has virtually shut the government down, with Schmidt, top officials and opposition leaders locked in lengthy "crisis staff" meetings.

Although most West Germans remain calm, taking events in stride, the inclusion of business leaders on the terroists' "hit list" is making dramatic changes in the lifestyle of the nation's elite:

In Stuttgart, Mercedes-Benz says orders for bullet-proof limousines are up sharpl

In Frankfurt, center of the powerful banking industry, private protection companies are doing a brisk business in bodyguards.

In the quiet streets of Bonn's government quarter, police working by the eerie light of searchlights are stringing barbed wire and sandbagging sentry posts outside the homes of leading political figures.

The wave of incidents has produced demands from some quarters for tougher laws, restrictions on lawyers sympathetic to terrorists, increased police forces, creation of a federal police force along the lines of the American FBI and capital punishment.

"These murders have launched an attack on our entire nation, on our democratic state, on its internal peace and therefore on our freedom," Christian Democratic opposition leader Helmut Kohl told Parliament today.

"The citizens have heard enough speeches," he said. "Now they want to see action."

Schmidt, too, warned that these killings and abductions "are directed against our liberal order as a whole, against any human order whatsoever and therefore against all of us."

He said the government is prepared to discuss new laws to combat terrorism more effectively, but said these must be based on the principles of the constitution and in the interests of the nation as a whole.

"All our thoughts and plans are aimed at a solution in accordance with our basic principles of morality and ethics and our belief in the fundamental value of a free society," he said.

Schmidt said the government would not let the terrorists push West Germany into a police-state overreaction.

"We won't catch your insanity," he said. The terrorists' idea that they are an elite striving to free the masses is "absurd," he said. "The masses stand against you."

Social Democrat Party floor leader Herbert Wehner, a major figure on the left wing of the ruling coalition government, said the terrorists are not engaged in an ideological struggle but rather in "an organized and armed struggle to make politics impossible."

Public-opinion polls show overwhelming rejection of terrorism here, but they also show a growing feeling of helplessness and frustration.

In April, federal prosecutor Siegfried Buback was gunned down, as was banker Juergen Ponto in July.

The kidnaping of Schleyer - in which three security officers and a driver were killed - is now in the 11th day of a life-and-death standoff with negotiations being carried out largely in secret through a Swiss lawyer, Denis Payot.

For Schleyer's life, the kidnapers are demanding release of 11 terrorists from West German jails, including the surviving members of the notorious Baader-Meinhof gang, and safe passage for them to countries of their choice, reportedly South Yemen or North Korea.

The government here is not likely to give in to those demands. Thus far, it is credited with handling the situation skillfully, buying time to try to track down the terrorists and carefully responding to each new message from the abductors so it will not be responsible if Schleyer is killed.

Although Schleyer had three bodyguards and was in a two-car convoy when he was abducted, it was obviously not enough protection.

The belief of less than a year ago that police had broken the back of the terrorist organizations has disappeared. The offshoots of Baader-Minhof are still around and may be even more skilled killers. The police have not been able to infiltrate this new generation of terrorists.

West German, ultrasensitive to its postwar image and devotion to democracy, is once again confronted with the question of how far this society> in particular, can go in balancing protection of civil rights and the battle against terrorism.

The situation is certain to refocus attention on the nation's youth, who make up one-third of the unemployed yet are without creative government programs to help them, and on clusters of extreme leftist professors in some universities who express sympathy for the terrorists.

Mixed in with the tensions surrounding the wave of terrorism is growing bitterness toward France because of the anti-German tone of French press coverage of the incidents. Without naming France, Schmidt criticized foreign newspapers that blame the terrorism on some innate German sic