Two bare-chested men sat on the dirt floor in front of a small open forge, hammering in a practiced rhythm on a bar of red-hot stainless steel.

They looked like ordinary country blacksmiths, perhaps making a part for a plow or a wagon axle. Instead, though, the bar they were hammering was to end up as a delicately balanced surgical instrument for use in a hospital in the United States, Britain or West Germany. The two men make 300 parts a day for surgical forceps.

It is an incongruous beginning for something that has to be made to exacting measurements. Yet the work of the craftsmen, who do all their measuring by eye, is checked by engineers to make sure it meets the specifications set up by the world's doctors.

About 25,000 men in this city of 204,000 are engaged in a thriving industry making surgical instruments by age-old methods for export to the world. Their prices are considered low and the quality is high enough to win constant reorders.

Bashir Mohammed Saharan, an official of United Surgical Works here, said some instruments made by his company are shipped to West Germany, where they are restamped to make it appear that they are manufactured there.

"They import from us, stamp it 'Made in Germany' and then reexport it at a 200 percent markup," he said.

The export of surgical instruments brings about $25 million a year in badly needed foreign exchange to Pakistan. Although the amount does not seem great, in a country such as this whose major exports are agricultural -- rice and raw cotton -- $25 million worth of exports makes the surgical instrument industry the third-greatest export earner among manufactured goods, behind cotton yarns and cotton clothes.

Moreover, one Western economics expert called small cottage industries such as surgical equipment, ceramics and small electrical goods "the area of the most dynamic growth in the country."

The United States is the largest importer of surgical instruments from Sialkot, buying more than $8 million worth last year. West Germany is second and Great Britain third.

The factories are truly primitive -- connected sheds with one open side arranged around a courtyard. The workers for the most part sit on dirt floors making the instruments by hand. There are few machines.

Young boys -- one a child who looked to be no older than 8 -- do some of the final polishing work. A foreman explained that the boy was sitting with his father, a regular worker, but the child seemed to be polishing the instruments with everyone else in the room.

It is partly because of the use of child labor that the factories of Sialkot can undersell the surgical instrument manufacturers of the West.

Nevertheless, instrument making is a proud trade in Sialkot, which is in an area whose residents are renowned for their ability to make anything.

"They are like machines themselves," said a Pakistani journalist who often visits here. "Once they see something made, they just keep on doing it the same way until they are told to stop."

The industry started here in the early 1900s when doctors at an American missionary hospital needed some surgical instruments repaired in a hurry.

They were so impressed with the emergency repairs made by the local blacksmiths that they brought more instruments in to be fixed instead of sending them to Europe or the United States. Soon the workers here were making surgical goods for doctors throughout the Indian subcontinent.

The industry flourished during World War II, when Sialkot helped fill the needs of the Allied war effort, especially since Germany -- the traditional source of surgical supplies for Britain and the United States -- was on the other side of the fighting.

The range of products made here is impressive. One company -- United Surgical Works -- has an 89-page catalogue of surgical instruments and a separate 66-page catalogue for dentists.