This ancient city on the River Mersey, which locals proudly call the second best known in England, was once a great port and manufacturing center and later earned worldwide celebrity as home to the Beatles and their musical revolution.

Today, Liverpool, by nearly every economic or social measure, is in desperate straits -- the scene of youth riots with racial overtones, business collapses, massive unemployment and dilapidated housing -- a case study of modern urban blight.

The birthplace of the industrial age was in English cities such as these, but Liverpool may be sounding its death knell.

With 3 million people now jobless throughout Britain -- one in seven of the work force -- problems that began here are spreading rapidly around the country.

"We've always been pacesetters in Merseyside, the first in everything including catastrophe" said Ted Spencer, a tousle-haired businessman, expressing a life-long Liverpudlian's cockeyed pride.

Some of the decay is merely age: Old enterprises become outdated, and 100-year-old tenaments turn into slums. But more startling as a portent for the future is the failure of the welfare state: The collapse of nationalized auto and shipping firms; the nightmare of 25-year-old "new towns," where jobs are disappearing, and the state-supplied homes that are more like hovels.

Unemployment in the Liverpool area is about 20 percent. But among some groups, such as young blacks, it is almost total. In each of the past three years, 10,000 jobs have disappeared, according to official figures. Increasingly, those out of work have been unemployed for more than a year.

More than 20,000 people are waiting for new public housing. Yet there are large stretches of the city and some surrounding suburbs where buildings put up only 10 or 15 years ago stand empty because they have been vandalized beyond repair. Some high-rise buildings already have had to be demolished, while payments on the cost of building them will continue for years.

Where hundreds of ships used to dock weekly at the port, now there are only a handful. Half of the dock area was abandoned altogether 10 years ago. Major manufacturers of almost every kind have left the city. Newspapers each day carry notices of three or four bankruptcies.

"It is soul-destroying," said Sir Trevor Jones, chairman of the Liverpool City Council.

Last summer, youths in an area of the city called Toxteth, or Liverpool Eight, went on a rampage against what they said was police harassment. Hundreds of policemen were injured, and one youth was killed; buildings were burned and shops looted. Many of the rioters were blacks who said then and later that racism was a prime cause of their fury. But some of the rioters were white. This summer there have been similar, but smaller, disturbances in parts of Liverpool where no blacks were involved.

Serious rioting hit elsewhere in Britain last summer, including London's Brixton district, where many blacks live and relations with police were also an issue. Liverpool's tensions are hardly unique. But even those closest to the black community here, which includes about 5 percent of the city's half-million people, recognize that a broad range of worsening socioeconomic ills -- in which race is only one factor -- are to blame for the eruptions.

The root cause of the continuing trouble, said Paul Summerfield, director of the officially funded Merseyside Community Relations Service, are crippling problems such as unemployment and poor housing. "Blacks suffer these acutely," he said, but so do Liverpool's whites.

The inner-city decline of Liverpool, like that of so many cities in the United States, has been under way for years. Changing patterns of production and work have cut into the labor force. The port alone employs only a quarter of the people it did 20 years ago -- a loss of 15,000 jobs. Once robust industries such as steel and autos have closed or consolidated plants as Britain's economic position has deteriorated and the size of its manufacturing base contracted.

The city also has suffered, officials say, because "it faces the wrong way" toward the Atlantic. Once Liverpool prospered when much of Britain's trade flowed toward the old empire and the United States, but now Britain has joined the European Community and much of the country's trade has been redirected toward Europe.

"We'd have been better off if we'd have become the 51st state instead of joining the EEC," one lifelong Liverpudlian observed bitterly.

Liverpool's population has dropped from more than 800,000 at the end of World War II to its present level of 500,000, and it is still falling. The downtown district has every bruise of a city in serious trouble. A 20-acre site in front of the main Anglican cathedral, the largest in Britain, is a mass of rubble and weeds. The Adelphi Hotel, which was so grand in the heyday of transatlantic shipping that it recently was used as a set for the popular television series, "Brideshead Revisited," has closed its restaurant.

Even the Cavern, site of the Beatles' legendary early jam sessions, has disappeared, covered over by a parking lot. Street after street of stores and apartment buildings are boarded over or show few signs of life. About the only businesses that seem to be flourishing are neighborhood pubs, a company that runs lotteries and a civic-minded commercial station, Radio City, which features advertisements for cut-rate furniture and carpets.

Parts of older industrial and residential areas look as though there had been a war: rows of empty shells no longer with windows or even floors. There are a few newer office buildings, including one for Royal Life Insurance and another for the local newspapers, the Liverpool Echo and Post. But much of the best office space in the city is used by government offices. The largest employer in Liverpool, with 30,000 workers, is the city council.

It is the role of the public sector, the enormous involvement of local and national government over many years, that makes Liverpool a case study of how modern solutions to economic problems can fail. Since the emergence of the welfare state and nationalized industries 35 years ago, billions of dollars have been spent on public housing and state-run manufacturing. In some places, up to 75 percent of housing is public, mainly subsidized low-rent apartments, according to official records.

But the nationalized industries are shrinking. Few ships are under construction and British-Leyland, the automaker, has given up its Liverpool plant. The government of Prime Minister Margaret Thatcher has reduced grants to regional authorities, which has cut into the number of public jobs. The nearly 130,000 unemployed in greater Merseyside are living on welfare, causing a huge drain on state funds while providing no useful work in return.

Perhaps the most dispiriting sight is Kirkby, a new town a few miles from the city center, which was the centerpiece of well-meaning efforts to create a better way of life for Liverpool's residents. In the space of a few years, 10,000 homes were built. A village of a few hundred swelled to 60,000 persons, mostly young families gratefully uprooted from the inner city.

A large industrial "estate" was erected. Businesses were attracted by incentives such as reduced taxation and the availability of willing labor. For a few years, Kirkby seemed to work. Geoff Henderson, 20, a local reporter who still lives there, remembers it as a happy place until about 10 years ago when unemployment, like some incipient epidemic, began to take its toll.

Serious vandalism was the first real symptom of crisis. Bored and out-of-work youngsters started trashing apartments left by families moving in search of work, Henderson said. Whole buildings were ravaged, and no money was available to repair them.

Ian Jevons, a 33-year-old trucker who was out of work for more than a year before taking a dead-end job that pays him less than welfare, lives in the ruins of one such compound. The inside of his little two-story house is neat. He has a television and record-player, but when he opens the door each morning, all he sees is devastation.

"The only solution," he said, "is to blow the whole lot up and rebuild." Many houses are being pulled down just to staunch vandalism.

Henderson said the industrial estate is known as "Death Row" because so many factories have closed down. Of those that remain, the big ones are outposts of American companies: Birds Eye Foods, A.C. Delco Batteries, Kodak and Otis Elevators. Unemployment is 50 percent and rising.

In contrast to the youthful anger that exploded in Toxteth, the overriding impression of a visit to Kirkby is resignation.

"People here have become shellshocked by it all," said Henderson. "It takes a lot to shock people here now." He and others said women regularly take valium, a tranquilizer prescribed at little cost by the National Health Service. Men spend hours drinking beer at pubs (one man said he used to consume 18 pints a day until he ran out of money) or watch television.

At first, those who have worked for years tend frantically to look for new jobs. But eventually they give up. Charles Irvin, a 42-year-old father of four, said he had not worked since 1976 and lives on his welfare payments and those of his disabled wife, a total of little more than $100 a week.

Aside from the rampant vandalism, which actually has dropped in recent years, there seem to be few indicators of social distress. Officials report no particular use of narcotics, no high incidence of violent crime, no disproportionately high rate of divorce. Kirkby is a community depressed in every sense of the term.

The same cannot be said for Toxteth. Liz Drysdale, a 28-year-old social worker, works for South Liverpool Personnel, a publicly funded agency that seeks to find jobs for local young people, mainly black -- with little success, she says. Of those between the ages of 16 and 19, 96 percent do not have regular employment, a recent survey reported.

In the year since the worst rioting, Drysdale said, little has visibly changed in Toxteth. Trees have been planted, and some police patrols are on the street instead of cruising in cars, which had been a source of resentment. But, she acknowledged, officials unmistakably have heard the angry voice of the city, even if in her view and that of others in the area, nothing much has been done.

"No one ever listened before," she said, "and because you start burning the place down, beating up people and people start getting shot up on the street, then people do listen. However, it has a very limited shock value."

Is nothing really being done to save Liverpool? Is the hopelessness of Kirkby justified? Or the cynicism of Toxteth? Just what is the government response to a situation that poses serious questions not only for Britain, but for all industrialized countries?

Next: The official response