Khena Ka Khotso, "Enter In Peace," says the archway over the main road into the capital of this tiny southern African nation. On the streets people greet one another with their usual quiet reserve: "Peace, mother; Peace, father."

But today there is no peace in what travel posters call "the magic mountain kingdom." A feud between the ruling Basotho National Party and the opposition Basutuland Congress Party has erupted since April last year into open warfare.

Like everything in Lesotho -- a craggy Maryland-sized state of 1 million people completely surrounded by South Africa -- the fighting has gone virtually unnoticed by the outside world.

That may change. If the Congress Party led by veteran nationalist politician Ntsu Mokhehle is right about the extent of its support among the population, and if its military wing, the Lesotho Liberation Army, is as strong as its recent activities suggest, the government of Prime Minister Leabua Jonathan could be in trouble. That would complicate the already tangled alliances of southern African politics and have serious, if unpredictable, implications for South Africa itself.

The fall of Jonathan would also cause a stir in the world of international aid institutions, whose contributions Lesotho has been able to attract on a massive scale. Although his government was ostracized for a period after 1970, when, having lost an election to the Congress Party, it cancelled the results, killed hundreds of opponents and declared a state of emergency, Jonathan is able to finance at least three-quarters of his budget from foreign assistance.

A 1978 study of Lesotho's economy published by the Scandinavian Institute of African Studies concluded: "The government of Lesotho has shown a remarkable capacity to obtain aid during a period when violently repressive methods were applied against a majority party."

That capacity stems largely from Basotho officials' assertion that their recent attempts to lessen Lesotho's dependence on South Africa has resulted in escalating reprisals by Pretoria, and that the current fighting is instigated by South Africa.

Lesotho has been noticeably less successful, however, at persuading its own people that the threat comes from abroad. A month-long trip around the country, which included bone-jarring journeys by four-wheel drive vehicles to remote mountain areas, uncovered a widespread reverence for opposition leader Mokhehle. The trip also yielded tale after tale of intimidation, torture and murder by the paramilitary Police Mobile Unit, whose heavy-handed methods have prompted nearly 1,000 people to flee across the border during the past eight months.

The fighting has intensified in recent months to the point that government officials say attacks are occuring almost weekly, with an unknown number of casualties. Earlier this month the government displayed nine bullet-riddled bodies of Congress Party fighters killed in a fierce daylong battle on June 2. Also on view were large quantities of confiscated ammunition and weapons of Soviet, Belgian and South African origin.

Congress Party leaders say most of their arms captured from government forces and vehemently deny any ties with South Africa.

"We started fighting in April 1979 with less than 100 people," said a chief Congress Party strategist. "Today we have nearly 300, and we are supporting all of them with our own resources. We are not fighting for the liberation of territory; we have the territory. We are fighting to eliminate the state machinery, destroy the police. We don't need to retreat into South Africa. The people are our cover."

Prime Minister Jonathan for his part, is simultaneously and skillfully courting East and West by stressing opposition to white-ruled South Africa. c

"We, the poorer countries of the world, are anxious for assistance, and we are ready to receive it from anywhere so long as there are no strings," he said in an interview. "The U.S. is concerned about the increasing erosion of Western values in Africa. It seems to me that there is no better way for the U.S. to maintain these values in our continent than expressing solidarity with us in our plight by increasing its aid."

Since 1977, when Lesotho went on a verbal offensive against South Africa in international forums, total annual foreign aid for capital expenditures has risen from $16 million to $37 million. fIn its current development plan, the Lesotho government projects receiving $66 million in assistance during each of the next five years.

American development assistance rose from $1 million in 1976 to more than $13 million this year, with an additional $6 million in food aid and $28 million (appropriated in 1978) for road building. Lesotho's 130 U.S. Peace Corps volunteers represent the largest per capita contingent in Africa.

In its quest for friendship beyond Europe and North America, Lesotho has established diplomatic ties with the Soviet Union. It also has built links with such Marxist states as Yugoslavia and Cuba and patched up its formerly strained relationships with South Africa's opposition African National Congress, opening Lesotho's territory to political refugees and allowing the group's officials fee access.

Both Western donors and Lesotho's new socialist friends say their policies are designed to help Lesotho disentangle its economy from South Africa's and develop towards self sufficiency.

So far, however, Lesotho shows no sign either of decreasing its reliance on its white-ruled neighbor or of developing a healthier economy.

According to a leading critic of the government, newspaper editor Edgar Motuba, guerrilla actions have "aroused people" and created a revolutionary situation in Lesotho.

Yet he still believes strongly that we could achieve peace in this country" if foreign aid donors would pressure the government to sit at a conference table with Mokhehle -- a course of action it shows no inclination to pursue.

Instead, the government may be turning back to South Africa for support. Last month a South African Foreign Ministry delegation flew to Maseru for a meeting between Prime Minister Jonathan and his South African counterpart, Pieter W. Botha, were confirmed by both governments.