Police armed with billy clubs, but not guns, arrested hundreds of demonstrators yesterday in the first antigovernment May Day labor rallies attempted here since the 1973 military coup.

Among those reported under arrest were at least two prominent Christian Democratic labor leaders and more than 600 workers or members of their familes. Also arrested were Newsweek's South American correspondent, and Associated Press reporter Ron Moreau, Carlos Cisternas, who were covering two of the several labor rallies held in Santiago yesterday.

Cisternas was released after an hour.

Moreau, freed after several hours, said neither he nor the 300 others held at the 6th Police Commissary were badly treated during the time he was under arrest.

Police did not attempt to break up the largest ally, attended by at least 2,000 persons, in a downtown Catholic church. Those inside the church responded to a speech by Eduardo Rios, president of the Maritime Workers Union, with chants of "Liberty, Liberty" and songs symbolizing opposition to the military junta.

Meanwhile, the junta announced its intention to reinstate limited collective bargaining rights for the 3 million unionized workers. Labor Minister Vasco Costa said this relaxation of the government's restricition on unions will occur in the near future "if the economy allows."

Restoration of collective bargaining was one of the demands that union leaders would have made had they been allowed to read a joint statement signed by 23 union presidents, ranging from centrist Christian Democrats to Communists and Socialists.

Early yesterday morning, before the rallies and arrests began, a bomb blew out the windows of a branch of New York's Citibank. The bank's office is within two blocks of the Moneda Palace, Chile's traditional seat of government, where Salvador Allende died almost five years ago in the military coup that ended this country's democratic tradition.

The labor demonstration came against a backdrop of increasing liberalization by the military government of President Augusto Pinochet. In recent months, Pinochet has granted amnesty for political prisoners and exiles, appointed a Cabinet with a majority of civilians and announced that a new constitution will be ready by then end of the year.

Some labor leaders indicated that the anti-government May Day demonstrations were designed to test the limits of the new designed to test the limits of the new attitude. Despite the arrests, there were no reports of injuries and the police were more gentle in handling the demonstrators than they would have only months ago, according to several observers.

At the same time, the mass arrests and the government's refusal to give the union permission to hold the rally indicated that the military junta is not yet prepared to allow public displays of antigovernment sentiment.

The union leaders decided to defy prohibition of the May Day demonstration, obviously believing that the government would not risk its recently improved world image by shooting or clubbing participants.