China is covertly training and arming Laotian insurgents to fight Vietnamese troops stationed in the strategic Southeast Asian nation of Laos, according to Western European diplomats here who recently visited areas near the Sino-Laotian border in China.

These diplomats reported a chance encounter last month with a self-described Laotian guerrilla in southwest China's Yunnan Province. The encounter provided the first confirmation of earlier reports by western intelligence sources of small-scale Chinese support for the Laotian insurgents battling their country's pro-Hanoi government.

Diplomats who recently visited areas near the border said they were told that Chinese military advisers operate eight camps strung along the southwest Chinese frontier in Yunnan Province. More than 1,000 young Laotians are said to be receiving light weapons and guerrilla training for use against the estimated 50,000 Vietnamese troops backing the Vientiane regime.

The Chinese Foreign Ministry denied the reports today, calling them "sheer fabrication."

China, once Hanoi's closest ally, now calls its southern neighbor "little hegemonists" bent on dominating Southeast Asia with the help of "big hegemonists"--the Soviet Union.

Peking employs a regional strategy directed against Hanoi, with open material support for resistance groups fighting Vietnamese forces in Cambodia and with public pledges to aid Thailand against any Vietnamese aggression.

As late as last month, Chinese and Vietnamese troops reportedly engaged in fierce artillery duels across their heavily militarized borders.

Reports from Hanoi-based diplomats and some Vietnamese officials this month downplayed the intensity of these clashes. The diplomats pointed out that China's response to Hanoi's March offensive against Cambodian rebels along the Thai-Cambodian border, which allegedly violated Thai frontiers, was at least as much bellicose propaganda as military action.

Foreign analysts believe Peking rounds out its anti-Hanoi policy in Southeast Asia by aiding the Laotian resistance, a factionalized, ill-equipped band said to number several thousand men throughout Southeast Asia.

Most Laotian insurgents live in refugee camps in northern Thailand, according to western diplomats. They are said to range the ideological spectrum from left to right.

China's reported contribution to the Laotian effort is cloaked in secrecy by Peking for fear of Vietnamese reprisals along a new war front, diplomats said.

Western European diplomats who toured Yunnan Province last month apparently pulled back the cloak through a chance encounter with a Laotian who identified himself as a guerrilla undergoing training by the Chinese military at a border camp he called Muong Phong.

The young man told the Europeans he began training in China a year ago, after an earlier training stint in Thailand. He said he receives a Chinese salary equal to $7 monthly along with food and small arms to resist Vietnamese troops when he returns to Laos. He said he expects to return soon.

He reportedly said more than 1,000 insurgents were being taught guerrilla tactics in the eight Chinese border camps. After their training, which lasts about a year, they will cross into Laos, raid Vietnamese installations and come back to the Yunnan base to resupply, he told the diplomats.

He said the guerrillas are nationalists receiving instructions and dedicated to the overthrow of the pro-Hanoi regime. They reportedly were recruited from a total of 3,000 Laotian refugees who settled in Yunnan after the Communist victory in their homeland in 1975. Laotians receiving training in the Chinese camps go to the provincial capital of Kunming for processing and indoctrination by Laotian instructors, the insurgent was quoted as saying.

Ironically, the Laotian insurgent said his group feared eventual Chinese domination of his country if Vietnam ever were expelled.

Western diplomatic sources say the largest of the Chinese training camps is in the town of Mengla just north of the Laotian border. Two other camps are said to be located at Menglian and Menghai.

The Laotian insurgency complicates Hanoi's occupation of Laos while distracting it from its battles in Cambodia and its defense of the Sino-Vietnamese border, according to analysts. At the same time, the guerrillas are believed to be helping Peking keep open a small corridor in Laos needed to transport military supplies to the resistance in Cambodia.

"The Chinese will support anyone who is prepared to make life more difficult for Hanoi," explained a European envoy.