The old crooner himself, Frank Sinatra, still makes a point of appearing at Monaco's annual Red Cross ball. Adnan M. Khashoggi's yacht continues to draw gasps from the tourists when it enters the principality's picture postcard harbor. And the bar of the venerable Hotel Paris is still the preserve of painted old ladies who look as if they have wandered straight out of La Belle Epoque.

In short, despite the arrival in power of a left-wing government in France and the death in a car accident in 1982 of the charismatic Princess Grace, remarkably little has changed in this anachronistic city state. Monaco's reputation as the capital of glamor and luxury has withstood numerous predictions of disaster.

"Princess Grace was a real grande dame, the perfect ambassadress for Monaco," sighed Pierre Cattalano, a director of the Monte Carlo casino, his face creased in a seemingly permanent expression of amused fascination from half a century of observing human nature at the craps and roulette tables. "It was a catastrophe for everyone when she died, as if a close family member had passed away. But the parties and the galas still go on."

The story of how Monaco, a country so small that its ruler likes to boast that he can invite all his subjects to dinner at the same time, has survived intact into the last part of the 20th century is a case study in the transformation of a romantic fairy tale into a highly profitable economic enterprise.

The legend of Grace Kelly, the actress who became a princess by marrying His Serene Highness Rainier III, has been frozen for eternity in magazine covers, picture postcards and postage stamps. Her tomb in Monaco's neo-Romanesque cathedral has become a place of pilgrimage for millions of tourists. The paparazzi, photographers who make a living selling pictures of famous people to magazines, have transferred their allegiance to her daughters, Caroline and Stephanie.

Like other successful corporations, Monaco has prospered because it has been able to patent several highly marketable products. To the international jet set, the principality sells prestige and privilege. To the less well-heeled, it is the purveyor of dreams and fantasies.

"Our business is the art and style of life, an area that we pride ourselves on knowing better than anyone else," said Dario dell'Antonio, director of the principality's most luxurious hotel chain, gazing out across a moonlit harbor carved into the rocky Mediterranean coastline.

Less than one square mile in area, Monaco boasts a population of just 27,063, of whom fewer than a fifth are full-fledged Monegasque citizens. Permanent residents pay no taxes and are excused from military service. In governing the country, Prince Rainier is assisted by a French minister of state, the equivalent of a prime minister, and an 18-member elected assembly known as the National Council.

It is somehow appropriate that the romantic love story that gave modern Monaco its national identity should have originated in the inspired idea of a magazine editor hungry for newsworthy pictures of glamorous people.

"We brought Grace Kelly and Prince Rainier together," boasted Patrick Mahe, head of the news desk at Paris Match, France's best-selling picture magazine. "It was love at first sight."

An American film star of Irish descent known for her portrayal of ice-cool heroines, Grace Kelly was the undisputed attraction of the 1955 Cannes Film Festival. As a gimmick, Paris Match suggested they photograph her in the exotic surroundings of the prince's palace at Monaco just down the coast. During the course of the picture session, she bumped into Rainier, then a timid 25-year-old.

A year later, on April 12, 1956, Princess Grace sailed into Monaco's tiny harbor aboard a luxury yacht, a tiny black poodle in her arms, a white hood covering her immaculately coiffed blond hair. As the prince stepped on board to greet her, thousands of red and white carnations were strewn in the sea, courtesy of the Greek ship owner, Aristotle Onassis. In less than a week, they were married.

The rest is history.

"If Monaco didn't exist, the picture press would have been obliged to invent it," remarked Charles Soccal, a trade union leader and former member of the National Council.

Relations between the French press and the palace are a curious mixture of hostility and complicity. Palace spokeswoman Nadia Lacoste has accused Paris Match and other magazines of intruding on the Grimaldi family's privacy. Journalists reply with charges that the palace is manipulating information. In the end, though, each side recognizes that it needs the other.

"Our readers need dreams and myths," said Mahe, explaining why Paris Match has featured the Grimaldi family on the cover 69 times since Grace Kelly arrived in the principality in 1955. In the previous 10 years, Monaco only achieved the distinction of a Paris Match cover once: in 1949, when Rainier was crowned.

Mahe added: "After getting back home in the evening from their dull jobs, people don't want to read stories full of gloom and despair. Life can't be made up simply of different shades of gray. Deep down, the French are still monarchists at heart."

Far from drying up after princess Grace's death, news of France's nearest equivalent to a royal family has actually expanded at a remarkable rate. First there were the "whither Monaco after Grace" stories. Then came Princess Caroline's second marriage to a young Italian businessman, Stefano Casiraghi, and the birth of her son.

Last year saw an epic battle for the heart of 19-year-old Princess Stephanie that set two sons of famous French actors against each other: nice, clean-cut Paul Belmondo and rough, tough Anthony Delon.

Both rivals have since dropped out of sight and camera-shy Stephanie has now embarked on a new career -- as a top-paid model. She reportedly receives fees of up to $50,000 per picture session.

The constant publicity surrounding the Grimaldi family represents a source of free advertising for Monaco, a country whose image is inextricably bound up with its product. The image of glamorous living bequeathed to Monaco by Princess Grace has enabled the principality to diversify away from gambling, once its principal source of income, to other economic activities such as tourism, top-notch sports events, the hosting of conventions and tax-free services.

The different elements in Monaco's modern economy are easily visible from the harbor. On the left rise the ocher walls of the prince's palace and the government buildings. On the right are the luxury hotels and shops of Monte Carlo, famous for its annual Grand Prix race and casino.

In between are high-rise apartment blocks and banks, the result of a building boom that has turned this tiny sliver of once barren rock into one of the most valuable pieces of real estate on the Mediterranean. Tucked discreetly away behind them is an industrial zone with factories producing such items as pharmaceutical products, luxury clothes and jewelry.

The motor of the Monegasque economy is still the Societe des Bains de Mer, or "Sea Bathing Company," founded in 1863 by Prince Charles III in an attempt to open up his country to the modern world. The part of Monaco that is now known as Monte Carlo ("Mount Charles") was constructed between 1863 and 1868.

"Most of the gambling stories associated with Monte Carlo are false," said Francis Rosset, the director of historical archives at the S.B.M., as the Societe is known to everybody in Monaco. "To me the most remarkable story is the story of how this place was built. In 1863, this was a barren piece of rock covered with nothing but olive trees. By the end of the decade, the name Monte Carlo had become famous all over the world."

During the '50s, control over the S.B.M. passed to Onassis, before reverting back to the royal family in the 60s. The Greek ship builder is now accused of trying to impose thoughtless development schemes on Monaco with little heed to the environmental consequences.

One measure of Monaco's present prosperity is that the principality is in the enviable position of importing labor. Thousands of Italian and French workers cross the frontier every day to work in Monaco's factories and hotels. The last major strike was in 1952, and it was rapidly settled when the Monegasque authorities took the step of expelling the principal organizers from the country.

"The unemployed never show up in the statistics since they are simply exported to France," complained Soccal, the president of the country's fledgling trade union organization who probably would have been deported himself but for his Monegasque citizenship.

A lifelong Communist now in his 70s, Soccal is about the nearest one can get to a loyal political opposition in Monaco. He seems amused by his status as the principality's only readily identifiable republican, which he said makes him feel like "a specimen from a museum." He likes to tell visitors the story of how Princess Grace once greeted him with the remark in her heavily accented French, "I know you are very, very Communist," to which he replied, "Well I try to be, ma'am."

Together with the principality's small band of Socialists, Soccal is disappointed at the rather soft attitude taken toward Monaco by President Francois Mitterrand, France's first leftist head of state in over a century. Far from cracking down on the principality's fiscal and other privileges, Mitterrand went out of his way to confirm them last year when he became the first French president to honor the country with a state visit.

Acknowledging that his "clock is set at a different time" to the vast majority of his compatriots, Soccal said there is more than an element of self-interest in the historic attachment of the local population to the house of Grimaldi.

"People here feel that if the monarchy were to disappear, their privileges might disappear as well," he said.

The opposite point of view is taken by Lacoste, the palace spokeswoman for the past 30 years, who insists that the monarchic principle is not at all anachronistic.

"The real justification for the monarchy in Monaco is that it provides long-term stability to the country. When Onassis was running the S.B.M, he was interested only in short-term gain. The prince thinks of the long-term interest of the nation," she said.