Handsome new color photographs of Archbishop Makarios stare from the walls in the Greek sector of the Cypriot capital, but eight years after his death his shadow no longer dominates this divided island in the eastern Mediterranean.

The diminished importance of his once intransigent legacy, and the ruins of the Greek-dominated first Cypriot republic he ran after Britain granted independence in 1960, are rarely mentioned in public now. But they constitute a significant part of the backdrop of this week's talks at the United Nations -- the most important negotiations between Greek and Turkish Cypriots in five years.

A local newspaper editor remarked privately, "Makarios is no longer an untouchable saint" for Greek Cypriots, who make up nearly four-fifths of the island's estimated 650,000 inhabitants. "That is new."

"We Greek Cypriots now admit to ourselves that Makarios and our other leaders could have made better settlements in the past -- and should have accepted compromises," he added. "That, too, is new."

Outmaneuvered in November 1983 when Turkish Cypriots unilaterally proclaimed independence for their portion of northern Cyprus, and caught off balance again last fall when Turkish Cypriot leader Rauf Denktash offered territorial and consitutional concessions, the Greek Cypriots realize that they are on the defensive and must come up with their own ideas for a federated republic.

That means that 11 years after the Turkish Army invaded and occupied 36 percent of the island, many Greek Cypriots grudgingly have come to accept the idea that the two communities must live separated.

Many of the original 180,000 Greek Cypriot refugees who fled the Turkish invaders are now housed in satellite towns built for them, often with U.S. aid funds.

If the negotiations succeed, as many as 40,000 could return to Varosha, the Greek sector of the port of Famagusta where there are about 30 deserted luxury hotels owned by Greek Cypriots. While older Greek Cypriots may pine for their villages in the Turkish sector, many younger ones appear to have no such attachment.

Although the Turkish Cypriot sector is in the economic doldrums, the Greek Cypriot sector has warded off serious economic recession through expanding tourism, con-struction contracts in the Persian Gulf and light industry, such as ready-to-wear clothing and food processing.

The Cypriot government officially and Greek Cypriots privately say they were encouraged when about 30 Turkish Cypriot journalists accepted an invitation for the post-Christmas ball given annually by the Greek-dominated Cyprus Union of Journalists. Among those who came was Raif Denktash, son of the Turkish Cypriot leader and head of the Turkish Cypriot Social Democratic Party.

"They were the star attractions after so many years," the local editor said, but he wondered whether his teen-age son, who in the past decade had had no Turkish Cypriot friends, would have felt the same elation. After so many years of separation, only the older Cypriots have childhood memories of growing up with members of the other community.

This cautious optimism is attributed to sometimes contradictory reasons ranging from the mellowing effects of time to high policy moves in Washington, Brussels, Ankara and Athens.

All but overlooked is the presence of the nearly 21-year-old U.N. peace-keeping force of 2,311 troops drawn from seven nations. They have provided the safety net that has kept intercommunal violence to a minimum, at an annual cost of $100 million.

Nowhere along the 135-mile-long buffer zone separating the two sides is tension more palpable than in the narrow, winding streets of the Old City of Nicosia, now patrolled by 425 members of the Royal Canadian Regiment's 1st Battalion.

The Canadians keep an eye on rival Greek and Turkish Cypriot troops, who face each other from well-entrenched positions often fewer than 10 yards apart.

Although flare-ups are infrequent, 13 months ago a Greek Cypriot soldier was shot dead outside his observation post and now the Canadians man a post 10 yards away to keep the lid on.

Around the clock, lightly armed two-man Canadian teams record, and try to stop, the usually minor violations -- name-calling, occasional rock-throwing and shining of lights at the adversary.

Every rusted, sand-filled barrel replaced by a new one, every new bit of metal sheeting is scrutinized by the other side, lest the rivals improve a position at its expense. Yet, recently Greek and Turkish workers laid a new sewer pipe in the buffer zone under the watchful gaze of the Canadians.

Such mundane practical successes may yet prove to have set in motion examination of the complicated details of any deal.

The details -- the sharing of power and guarantees for the Turkish minority, how and when the remaining 24,000 mainland Turkish (and about 3,000 mainland Greek) troops would leave, who would guarantee a final settlement -- have scuttled previous negotiating rounds.

By general agreement the present round owes much to the doggedness of Javier Perez de Cuellar. Before becoming U.N. secretary general, he spent years as U.N. special representative on the Cyprus issue. Also helping were the Reagan administration, the Council of Europe and the European Community.

Diplomats here say all these bodies kept pointing out to Turkey that it was in its and the West's best interests to prevent further deterioration on NATO's exposed eastern flank.

Although President Reagan wrote a personal letter to Turkish President Kenan Evren in November suggesting such an accommodating step, some diplomats say they believe that the Turkish leader already had made up his mind to move. Turkish aid had just squeaked through the U.S. Senate and, as one diplomat said, "Evren didn't need a diagram."