Of the 558 square miles of real estate to be ceded to Panama under the proposed Panama Canal treaties the least coveted is the community of Palo Seco, a tiny, serene village just west of the waterway's Pacific Ocean entrance.

Palo Seco is a leprosarium, operated in the zone since the disease-ridden days of canal construction. Funded by the U.S. Congress, with a 1976 operating cost of $473,000, the colony has provided medical staff, supplies and a home for more than 500 leprosy victims since its founding 70 years ago.

Panama has shown little interest in the dwindling settlement, which now only has 40 patients. Thirty-nine are Panamanians but, as the U.S. Canal Co. likes to remind visitors, the Panamanian government stopped paying its citizens' bills in 1958 and is currently $4.79 million behind in payments to the hospital.

As change now looms over the Canal Zone, the patients are afraid that their self-contained community including the leprosarium, will pass into Panamanian hands six months after the treaty is ratified.

"Most people have spent all their adult life here and it's the only home - a cluster of wooden frame buildings with vegetable gardens, a commissary and a Catholic chapel - will come to to deal with and I'm having trouble filling staff vacancies."

Panamanian officials say there are they've known," said administrator Elizabeth Quintero. "The uncertainty is turning into a trauma. The patients are getting more and more difficult an abrupt end. Canal Zone hospitals, no plan yet for the leprosarium or the three other zone hospitals.

As with many local activities unrealted to running the canal, leprosy care dates back to the days when the waterway was under construction in the early part of the century. The United States built water filtration plant and storm sewers and waged war against Malaria to make the area habitable.

Then, as now, leprosy was not widespread in Panama, and health authorities report that they discover only three or four new cases each year. At the beginning of the 20th century, victims of leprosy were still treated as the outcasts they were in biblical times.

When seven patients were found confined to a ramshackle building near Panama City in 1904, the United States offered to take all leprosy care here, with Panama agreeing to pay for its own citizens.

It was Dr. William C. Gorgas, the man who conquered malaria in Panama, who chose the isolated Palo Seco beachfront. For many years, there was no road leading to the "leper asylum" as he named it, and patients and supplies had to be dropped off by boat.

Most of the Palo Seco patients arrived here in their youth, and the two oldest are 94. Only 12 patients currently have active leprosy, or Hansen's Disease, as the staff prefers to call the illness that attacks the skin or peripheral nerves, often leading to debilitating deformities, including blindness.

Although most of them are unable to see it the setting of their exile is a tropical paradise. An ocean breeze blows through the wooden pavilions and from the garden there is a soothing view of ships floating in and out of the canal.

The peace is disturbed only occasionally with cries of pain.

"They are not in constant pain," said U.S. nurse Sharon de Staffino, who has worked here for five years. "But some have had episodes and then they cry out. One old man who's blind thinks when the pain comes that we are throwing hot water on him so he shouts, telling us to stop."

To relieve the suffering, a number of the patients had their eyes removed many years ago, and their faces give the impression of masks.

"It may seem barbaric," said de Staffino," but once the leprosy attacked the eyes, and they lost their vision, the terrible pain continued. Removal was then considered the most humane thing to do."

The more able-bodied have gardened, fished, made love in and out of wedlock and given birth to nearly 100 babies over the years. The newborn are taken away from their mothers and raised elsewhere.

In the garden sloping down to the sea, a woman whose fingers are half-inch stumps does beautiful embroidery. Bedridden Iris Maitland talks cheerfully of the four sets of twins she had out here, whose visits give her much support.

In a corner of the men's ward, Herbert McQueen, 92, manages to climb out of bed by himself, even though his right leg was amputated a few months ago. McQueen demanded an artificial leg and has already learned to walk again.

Yet walking, for the few who can is a delicate exercise. The feet must be wrapped and padded carefully. Because leprosy causes loss of feeling and eventually complete anesthesia, hands and feet, or any part of the body, can easily develop bruises, blisters or wounds. Sharp edges and corners in the hospital are well-padded.

The pride of the staff is Juan Salazar, 77, who, blinded and badly maimed by the disease, has published a monograph on the life and times of the leprosarium. He dictated to staff members who found time to sit with him.

"I had all the facts in my mind," said Salazar, who is now finishing a second, more elaborate book. In the monograph, he recalls the horror of being treated as a pariah.

Salazar also writes of years when the hospital was run like a "military barracks . . .when patients could not sing or whistle," and would be punished for the smallest breach of the rules. There were separate beach hours for men and women, women had to be in bed by 8, and a wide distance had to be kept between patients and visitors.

Until 1958, the Palo Seco colony even had its own in-house copper currency to avoid spreading the disease through patient-contaminated money. Outgoing letters were sterilized with a hot iron.

While much more is now known about the illness, the Palo Seco staff, which includes four U.S. nurses, is anxious to dispel the stigma which our society still attaches to the words "leper" and "leprosy."

Hands and feet do not "fall off," a hospital brochure explains. Rather, the bones in the body's extremities slowly dissolve, and the skin retreats.

"Leprosy is not hereditary and is only midly communicable," explained the hospital's Dr. Guillermo Cedeno, "although the exact transmission mechanism is not known. Its bacillus is very similar to tuberculosis, and it's a very steady, slow process that we can easily control."

The treatment breakthrough came in the 1940s with the discovery of sulfone drugs, which replaced the previous treatment of ineffective and nauseating chaulmoogra oil. The sulfone interrupts the disease, but the patient must take the medication for life or the disease may reactive, Cedeno said.

This means that deprosy is now generally treated on an out-patient basis. But it does not solve the problem of Palo Seco's inhabitants. The deformities caused before the arrival of sulfones, the staff explained, made many patients too helpless or too unwanted to return of society or even a nursing home.

"They are one big family, and they are very fragile people as it is," de Staffino said. "Now, they are very worried about being taken away or confined somewhere strange."

With his bedside radio, Juan Salazar has followed canal politics and the Washington treaty hearings below by blow. He says he hopes the treaties will not be ratified, at least not for a while.

"It's better for everybody if we stay here," Salazar said. "Other people are very frightened of us, and we are frightened of leaving."