As the anguish of Christmas in captivity approaches for the American hostages inside, Iranians have turned the street outside the occupied U.S. Embassy here into an almost festive market-place reminiscent of a county fair.

Stands, pushcarts and brightly striped tents line Taleghani Street in front of the main embassy entrance. Sidewalk merchants sell boild beets, chestnuts or noodle soup the way vendors sell hot dogs in a U.S. park. Others sell cassettes of Koranic chants -- and even "Satanic" pop music from India -- or a host of goods rangining from Communist Party tracts to imported umbrellas.

The makeshift commerce has sprung up in the last two weeks, taking advantage of crowds passing to take a look inside the revolution's trophy in the battle against "imperialism," or to listen to Islamic chants from demonstrators knotted in front of the locked iron gates.

It seems to be part of a general drop in the tension that marked the atmosphere around the embassy for the initial period after militant Islamic students seized the embassy Nov. 4 and took more than 60 Americans inside as hostage against the return of the deposed shah.

In those first weeks, there was talk of a U.S. commando operation to free the hostages or punitive air raids on Iranian oil fields in Khuzestan. Although it perhaps was only talk, such fears in the flush of the early confrontation raised temperatures around the captured embassy and produced a feeling of grim determination and danger.

That atmosphere has softened now -- on the outside at least. But only after direct orders from Khomeini did the student revolutionaries agree to allow U.S. clergymen inside the embassy for Christmas services.

A student spokesman, speaking by telephone, still proclaimed that only the return of the shah will win release of the hostages, who have now been in captivity for 50 days. Posters, suspended from roofs and trees inside the embassy compound and papered across the brick wall on the street, still condemn the United States in harsh words.

One shows a distorted caricature of President Carter and the words "U.S. cannot do anything" above his furrowed brow. Another says, "America and Panama, shah should come back and get killed in front of Iranians." A third -- whose meaning is clear even with the misspelling -- reads: "Carter is a big dag and danky."

The demonstrators shouting slogans in front of the entrance include a few children and women draped with black chadors, full-length veils. Most, however, are young men. The number varies according to the hour of the day, but rarely reaches the thousands who massed to protest in the early days of the embassy seizure.

"In America or Panama, oh shah, we shall kill you," they chant, or "God is great, Khomeini is great." Another chant paying homage to the imam, who has become the symbol of Iran's revolution, says: "Khomeini fights, Carter trembles."

Despite the tough words, however, the mood outside the embassy is relaxed. Protesters frequently knock off for a few minutes to warm up on hot Persian soup simmering in large sidewalk cauldrons. An American visitor to the embassy gate sees ready smiles, even from the Revolutionary Guards carrying Iranian-made automatic rifles who form the students' embassy guard.

One young protester leading chants of "Carter is a danky" easily agreed with a request from a West German television cameraman tonight to hold down the noise while the correspondent read his dispatch into the microphone -- on condition that the cameraman then film the chanters.

Asked later where he learned his elementary English, the protester pulled from a manila envelope a 1956-59 edition of the American University graduate school catlogue and haltingly gegan reading the cover. His own vocabulary seemed limited to slogans.

"Carter is a dag, Carter is a dag," he chanted vehemently.He shouted on and waved his arms, repeating several times, "I feel sorry for American people." He then broke into a smile and fell silent.

Just across the street Aboulfezd Moradpour, 22, was selling hot chestnuts.

Iranians strolling by the embassy put vinegar and salt on them and ate them with their fingers like popcorn.

The main lane of Taleghani Street ordinarily reserved for taxis and buses, is now closed off for pedestrians who come in to see the demonstrations and read the scores of posters denouncing U.S. policy and extolling Khomeini and his confrontation with Washington.

Taleghani Street was not always the popular gathering point it has become. Several high-priced jewelry stores give an idea of the kind of people who used to stroll by the embassy.

Bagher Mozaffarian, 65, is the owner of one of them. It is still open, but empty and sad in muffled, carpeted elegance where golden frog broaches used to sell for several hundred dollars.

"We only have a few of our longstanding clients left," Mozaffarian said in his deserted shop, as the protesters' chants drifted through the show windows: "They phone us up and we deliver the merchandise to their homes."

Looking outside, he adds: "This is not our idea. I hope you understand what that means. People are afraid to come here now."