This Shiite Moslem village in the harsh, rocky hills of southern Lebanon was in the heart of an area controlled by the Palestine Liberation Organization and their leftist allies before Israel invaded last June, bombing redoubts and leveling all visible vestiges of the military and political institutions that the PLO had created.

Since the invasion, a stern Israeli occupying army has taken firm control of southern Lebanon, imprisoning Palestinian guerrillas and persons suspected of having aided them and conducting extensive searches for weapons caches.

Thus the presence of a half dozen armed young men on the streets here last week created something of a stir. Cars stopped in the middle of the road and families came out on their steps to glare as the small band marched slowly, deliberately through the village. The members carried loaded Soviet-made AK47s, the rifles that had been the hallmark of the PLO, but Israeli soldiers made no effort to stop them.

On the contrary, it was Israel that organized and armed them, apparently with weapons taken from the PLO caches it captured. There are similar groups in the nearby port city of Tyre. One of them, about 50 men strong, is headed by the scion of one of the big land-owning families of southern Lebanon, the Khalils, who fled from here at the outbreak of the civil war eight years ago and returned after the Israeli invasion last summer.

In the zone of southern Lebanon controlled by United Nations peace-keeping forces, the Israelis have attempted to form 11 such militias, according to western sources, but have established only one. Its head is a service station owner, Haidar Daigh. Daigh has an assortment of American-made radio equipment in his service station office. His troops swarm in and around the gas pumps.

Western military observers attempting to keep track of the various militia units have coined an acronym for them--CAUBI, for "Civilians Armed and Uniformed By Israel."

They appear to be part of an intensive Israeli effort to affect the political, military and economic landscape as Lebanese and Israeli diplomats are locked in disagreement over what the future of southern Lebanon shall be.

Israel's officers have also attempted to organize councils under their direction in villages and in the Palestinian refugee camps. The indications are that they have had some success in the camps but have been rebuffed in the Shiite Moslem villages, where there is a strong desire for the establishment of Lebanese central government authority after years of PLO domination and now the Israeli occupation.

Both political and religious leaders of the Shiite Moslems--the most populous group in southern Lebanon--have admonished their followers not to collaborate with the Israelis. And Nabih Berri, the head of Amal, the Shiite political organization, warned in an interview last week that if the Israelis are allowed to become entrenched in southern Lebanon, "I will break everything in Lebanon . . . We will fight."

Here in the hilltop village of Habbush, the local Amal leader, Abu Ali Rhumani, a short, wiry man in his forties, laughed mischievously as he described to visitors how he and other village leaders resisted the pressure of Israeli officers and in the end outsmarted them.

He said Israeli officers first approached him and other local leaders with the proposal that they form a village council that would oversee roads, water and electricity in Habbush. They refused. In mid-December, he said, Israeli officers arrested Rhumani and took him to a detention center in northern Israel where they attempted to get him to agree to form a village militia.

As Rhumani tells the story, the officers promised money and protection if he would go along and offered medical care in Israel or abroad if that became necessary. He says he invented excuses that he had a bad back and his wife and son were both ill. When he did not relent, they let him go.

A few weeks later they arrested him again, Rhumani said, and took him to a military barracks on the Lebanese side of the Israeli border. This time, he said, they took a harder line, threatening to hold him until he provided them with 10 names for a village militia.

A few days later, two more Amal members were arrested and brought to the barracks where Rhumani was being held. Village leaders in Habbush then provided Israeli officers with a list of names and Rhumani and the other two were released. Before they left, Rhumani said, an officer told them that if they tried to prevent people from joining the militia, "I am going to hang you."

It is at this point in telling the story that Rhumani and a friend sitting in his living room burst into laughter. The names the leaders had given the officers to form the militia that now marches each evening through the streets were the poorest, laziest youths they could think of, young men not known for any deep political beliefs but likely to be attracted by the Israelis' promises of help and remuneration. Before the invasion, he said, several had been members of a pro-Syrian militia.

Both western diplomats and military observers are confused about the Israelis' motives in forming the militias, since they are being deployed in many instances in areas also patrolled by the forces of former Lebanese Army major Saad Haddad, who has worked for years as Israel's ally in an enclave of southern Lebanon along the border.

In Tyre recently, there was a shootout between Haddad's forces and Khalil's militia. According to both Israeli and western military sources, Khalil's troops were angry that Haddad's soldiers were ogling the local girls.

The Israeli-armed militiamen are finding it politic to assert a distance from the occupying forces, sensing a mood that is turning against Israel.

"All prayed for Israel to come," Haidar Daigh said as he sat in his service station command post. "After one month, the people prayed for Israel to go."

In recent weeks there have been continued guerrilla hit-and-run attacks on Israeli soldiers. And few here believe that the explosion that killed 75 Israelis in Tyre in November was accidental.

Although they are confused by Israel's tactics, diplomats and veteran observers in Beirut say they have the feeling that the occupying Israeli forces are increasingly sinking into the Levantine quagmire that has befallen other occupying armies. "Leba Nam" is the name they have coined to describe what they believe is happening here.

His nom de guerre is Abu Tamara, a combination, he says, of his own first name and his daughter's. He is a major in the Israeli Defense Forces and from a military barracks in Tyre he deals with the local militias and a variety of other efforts that he said are aimed at getting the Lebanese adjusted to the "organized, civilian life" after years of war and turmoil.

Prickly, strongly self-assured and bearing an intense look on his smooth, swarthy face, he acknowledges without hesitation that Israeli officers have given arms to local militia. He describes these, however, as "symbolic acts" to help the Lebanese learn how to protect themselves.

What he wants to emphasize to two reporters who have stopped by his office are the sewing clubs and auto mechanics courses his civil affairs office is organizing and the soccer field it is building in the city.

"In a sense, the good Lebanese appreciate our Israeli system of life, our democracy, our organized way of life," he said. "So what we're doing is trying to teach them. Slowly. Slowly."

But woven into his conversation are elements of bewilderment, frustration. He said he tries to get the Lebanese to be less attached to religion, tries to persuade the fishermen who sail from the city to abandon their practice of catching fish by dropping dynamite into the waters. But, he said, "It's a daily fight with them."

He said he first became acquainted with Lebanon through his work with Haddad's forces, and he said he was also familiar with the very detailed information that Israel amassed about the PLO and leftist groups operating in Lebanon before the June invasion.

But since he has been here in the occupation force, there have been new lessons. "I learned more about the people," he said. "They are very selfish."

What rankles him most is what he considers to be the ingratitude of the Lebanese.

"I expected that after Israel got rid of the terrorists, the people would rush into the streets to hail Israel," he said. "Some of them did. Most didn't."

But, he said, "I'd rather be a winner and unpopular than popular and a poor guy like Lech Walesa."