About 5,000 leftist demonstrators marched in a funeral procession today to an intersection near President Ferdinand Marcos' Malacanang Palace, where they vowed to avenge two slain students and burned effigies of Marcos and Uncle Sam.

The protesters marched from a Manila church to a double row of barbed-wire barricades across Mendiola Bridge, about 400 yards from the palace gates. The march defied a new law on public demonstrations and Marcos' announcement last week of a "more aggressive and tougher" policy against unruly street protests, but security forces stayed out of sight even as the protesters burned the effigies atop the barricades. There was no violence.

The demonstration was the latest action in a movement that has become an adjunct to the growing insurgency being waged in the countryside by the New People's Army, the armed wing of the banned Communist Party of the Philippines. Organized by a coalition that even Marcos' opponents concede is essentially a Communist front, the demonstrators came equipped to battle police, who last Monday fatally shot the two teen-aged marchers mourned today.

Parading behind the coffin of one of the slain students under red banners representing leftist student and labor groups, many of the marchers concealed their faces with bandannas and carried clubs, staves and knapsacks filled with rocks or small homemade grenades called pillboxes. A few wore Chinese-style caps with red stars on the front or carried hammer-and-sickle badges.

That the march remained peaceful reflected not only the discipline of the protesters but the patience of a movement apparently committed to protracted "people's war" to overturn what it calls the "U.S.-Marcos dictatorship."

While Washington has shown heightened concern in Washington recently about the Communist insurgency's gains here, the radical left shows no indication of readiness yet to make a major push, either militarily or through popular demonstrations, to unseat the 20-year-old Marcos government.

Conscious of the premature drive that led to the collapse of a Communist rebellion in the 1950s, the insurgents warily chip away with slowly escalating but still relatively small-scale attacks in the provinces while trying to build up their following in the cities and maintain pressure on the government.

In the view of western and Philippine analysts, it is the government's inertia in dealing with this steady erosion, rather than any precipitous event, that has aroused the Reagan administration's display of concern this month.

A visit here by Sen. Paul Laxalt (R-Nev.), a close friend of President Reagan, to convey the U.S. concern to Marcos left behind some indignation at Malacanang Palace, according to the analysts. But they said he succeeded in puncturing Marcos' belief that he need not pay much attention to congressional and State Department prodding while Reagan is in the White House.

Through a succession of visits by what one palace official pointedly called American "proconsuls," Washington has been urging Marcos to initiate sweeping political, economic and military reforms to undercut the insurgency. However, Marcos, 68, has seemed intent on clinging to the status quo, insisting that he has been carrying out reforms since he was first elected president in 1965 and resisting any action that would hurt his supporters.

In apparent response to the U.S. concerns in recent days, however, Marcos has announced an overhaul of the 70,000-member Civilian Home Defense Force, a paramilitary organization intended to help combat the insurgency, and ordered the release of $28 million to equip and deploy five new armed forces battalions.

The Civilian Home Defense Force has been widely blamed for many of the military abuses that have helped boost support for the insurgents, including what one progovernment newspaper called "certain atrocities in the countryside."

Among its other failings, according to press reports, has been a tendency of its units to serve as private armies for politicians of Marcos' ruling party.

In one of the latest incidents, a unit of the paramilitary force opened fire on demonstrating sugar farmers and their supporters at Escalante in central Negros Occidental island in September, killing 21 persons.

Marcos said the force would be retrained and placed under the command of a regular military officer. "This will immediately prevent the CHDF from committing excesses and violations of discipline," Marcos said at a Cabinet meeting Thursday.

He said yesterday during a "command conference" with senior military officials that the deployment of five new battalions would compensate in part for a slackening of armed forces strength in the past year because a defense budget cut.

What these measures would amount to in countering the insurgency by at least 12,000 New People's Army guerrillas remained open to question, however.

One opposition newspaper columnist noted that Marcos "is a master at creating an illusion of reforms." He already had declared in an interview in May that he was setting up "a few more battalions" to help combat the insurgency.

The guerrillas, meanwhile, have been growing bolder. In the southern province of Surigao del Sur last week, suspected Communist hit men assassinated the governor, Gregorio Murillo, in the provincial capital. He was the highest ranking civilian official killed so far in the 16-year-old insurgency.