The battle raging around the ancient walled city of Harrar in Ethiopa is considered the most crucial fighting in the four-month-old war between the Somalis and Ethiopians over the disputed Ogaden region in Ethiopia.

Its outcome - and still unconfirmed reports suggest the Somalis have fought their way into the mountain top city - is expected to have major repercussions.

Harrar, and the city of Dire Dawa 35 miles northwest, are Ethiopia's last bations north of the Ogaden region and their fall would seal the Somalis' hold on four southeastern Ethiopian provinces.

If the highly motivated Somalis are thrown back in what military specialists have predicted will be their final push on Harrar and Dire Dawa, their other positions in the Ogaden could become quickly vulnerable to the much feared Soviet-equipped major Ethiopian counteroffensive.

Even lacking replacements for heavy equipment lost so far in the fighting, however, the Somalis still hold sufficient strongpoints in the northern Ogaden mountains to frustrate any quick defeat, according to military specialists.

An Ethiopian defeat, on the other hand, could signal the final blow to the shaky Marxist military government in Addis Ababa led by Lt. Col. Mengistu Haile Mariam.

Coming as the latest - and by far the most humiliating - in a long series of military defeats by the Somalies in the Ogaden and nationalist guerrillas in Eritrea, the loss of Harrar could lead to the kind of general collapse that befell the South Vietnamese army in the spring of 1975.

The Ethiopians are credited with having committed 80 tanks, 60,000 men, 200 light armored cars and considerable artillery to the defense of Harrar and its 40,000 inhabitants.

Seat of the Ethiopian military academy, and birthplace of the late Emperor Haile Selassie, Harrar is the key to Ethiopia's defenses.

Were the morale of the troops at Harrar to buckle once again, specialists doubt the Ethiopians would stop running even at Dire Dawa, where the Ethiopian air force maintains its last concrete landing strip in the Ogaden capable of handling jets.

The implications for the Soviet Union - and its South Yemeni and Cuban surrogates who are believed to be actively participating in the Harrar fighting - appear incalculable. Since midwinter, the Soviets have poured an estimated $500 million in military material into Ethiopia - to no visible result.