The Alfama, a dense cluster of small pastel plastered houses tumbling down the hillside below the cathedral is Lisbon's oldest quarter. It is a jumble of overcrowded dwellings. In the Beco do Carneiro or Sheep's Alley, the eaves of the houses overhang and provide a canopy for the three-foot passage.

Women in black dresses and black scarves hang washing from iron grill balconies filled with flowers. Shabbily dressed boys and men tend pigeons. Chickens wander in and out of doorways.

Suddenly, the houses give way for a small square, a breathing space. Everywhere there is a majestic view, either of pink, green or yellow houses perched on the terraces above or the broad Taugus River and the ships at anchor below. The only high rises are the towers of the cathedral or the spires of churches.

The people of the Alfama are poor - fishermen, laborers, jobless. The only visible political party is the Communist, with a large warehouse head-quarters at the bottom of the hill. There are no supermarkets where shoppers get lost in rows of goods. There are tiny shops where waiting women, served one at a time, must talk with each other.

By any material measure, Alfama is a slum, ripe for urban renewal. But it is also a vital community whose dignified citizens courteously take a visitor by the arm and lead him through the labyrinth of alleys to the tile mosaic he has come to see.

Alfama helps explain what puzzle George Orwell in "The Road to Wigon Pier," that some Britons preferred the most miserable Lancashire hovels to new public housing. The slum, Orwell found, had a "coziness" a sense of community, that the impersonal public housing could never provide.

The calm in Alfama has pervaded the capital below in this week of political crisis. The country is taking the fall of Socialist Premier Mario Soares very much in stride, convinced that this is an episode and not a tragedy. During the feverish political events of two years ago, sound-trucks roared up and down the magnificent Avenida da Liberdade crying, "Defend the revolutionary conquests of April 25" or "Death to fascism and imperialism." The sound trucks are still in evidence, but now they tout a movie or furniture sale.

Lisbons residents, do not place a high premium on silence, and love to toot auto horns at the slightest excuse. Some of the more enterprising sidewalk sellers have discovered a new way to disturb the peace. They sell cassettes of rock music on the street, plugging their wares through speakers that blare out the noise at passers by.

Many of the sidewalk sellers are "retornados," refugees who left Angola and Mozambique three years ago when the military coup that overthrew the dictatorship freed Portugal's African colonies. Some 600,000 poured into a poor country of 9 million, an overwhelming problem for a nation that needed no more. The refugees are no longer living in miserable camps or sleeping in the airport. Most have somehow been absorbed.

Few have found jobs, however, and crime has soared here. Girls of 12 and 13 support their families by prostitution. One businessman, returning to work late at night, stumbled on a pair of these child prostitutes and their client using his apartment house corridor as a brothel.

There was a great fear two years ago that the refugees, desperate and penniless, would provide fertile ground for a revived fascist movement. Like so many of the dark forecasts made for Portugal, however, this has so far proven groundless. The Portuguese charter is far more temperate, far moe moderate than the slogans carried on banners or sprayed on walls would suggest.

Most of the posters are faded and torn. If you look hard, you can find a picture of heroic soldiers and workers surmounted by a call for surmounted by a call for "demonstration of unity and battle against the advance of fascism." But the date of this "manifestacao " is not even visible.

In the same way, some of the colorful poster figures who dominated the world media two years ago have also faded from sight. There was Isabel do Carma, the Petite doctor, who ran the Revolutionary Bridgades and, in perfect French, would describe how her group had secreted enough arms for a division. Today, as far as anyone knows, she is practicing quietly as a pediatrician in a clinic.

Then there was Gen. Otelo Saraiva de Carvalho, chief of COPCON, the arm's revolutionary political division. Otelo, as he is called by everyone here, a disciple of do Carma and the wilder doctrines far to the left of the Communist Party.He is a major now, still facing charges for his part in the abortive far-left coup of two years ago. The charges are unlikely to be pressed as long as he keeps quiet. Otelo recently published a book about the events that led to the overthrow of the dictatorship. "The Dawn of April." It is scrupulously nonpolemical.

Palma Inacio fluttered almost as many hearts as the handsome Otelo. Like do Carma, he led another armed, underground group, United Struggle for Revolutionary Action. Its speciality was robbing banks. Portugal's moderate climate got to him, too. Today, he is a member in good standing of Soares's Socialist Party and a bureaucrat at the Ministry of Labor.

Compromise, coming to terms with a difficult exestence, is much more the style here than conflict or violence. So the leader of the conservative Christian Democrats suggests that Soares include a Communist minister in his next governmnet. This, it is thought, is the best way to discourage the workers' chief political representative from rocking the boat.

In much the same way, the new constitution recognizes that Portugal's politics in this century have been dominated by the military. Rather than let officers plot in their barracks, they are given a responsible, constitutional role. Their 19-man Council of the Revolution is called on to advise President Antonio Ramalho Eanes, himself a general, on the selection of a new government.

There may be a link between architecture and political style. Lisbon's buildings are pierced by ovals, pointed arches and circles. Alleys are barrel-vaulted. Buildings at corners are frequently curved. There are few severe rectangular towers or harsh right angles.