Widespread rioting broke out in this Protestant-dominated town today during a demonstration that Unionist leaders said could mark the beginning of a more violent phase in their protest against the Anglo-Irish agreement signed last November.

The rioting began after police banned a scheduled Protestant march here that they said had been infiltrated by "paramilitary and subversive elements" who planned to use bombs and firearms to spark a more widespread conflagration throughout the province.

Police said they fired at least 125 rounds of plastic bullets into crowds of thousands of protesters who smashed windows and tore up cobblestones to throw at security forces. At least 16 persons were injured, half of them police, who were behind rows of armored vehicles and under plexiglass shields when masked youths threw rocks and shards of broken glass at them.

Combat-outfitted British Army troops, reinforced by helicopters this afternoon, were positioned behind the police front lines. There were no reports of soldiers coming into direct confrontation with the rioters.

Yesterday, a large parade by Catholic Republicans took place in Londonderry, in the western part of the province. There, masked members of the outlawed Irish Republican Army appeared in the crowd and a British soldier was shot in the face and seriously wounded by a sniper.

Occurring amid widespread predictions of a summer of violence whose force will match the "trouble" of the 1970s, the riots are a significant blow to Prime Minister Margaret Thatcher's hopes for peace here.

Unionists, or politically active members of the province's Protestant majority who oppose any change in their relationship with Britain, have demanded that Thatcher scrap the November agreement signed with the Irish Republic. They charge that the accord, which gives Dublin a consultative say in the province on behalf of its minority Catholic community, makes them second-class citizens within the United Kingdom.

According to Thatcher, no British sovereignty has been surrendered and the reassurance afforded Catholics by the agreement will lessen their support for the IRA. The unionists counter that it is the first step toward the main IRA goal of Irish reunification.

Since the accord was signed, disparate elements of Unionist communities have debated over strategies for combatting it. First, in December and January, came the symbolic resignation of Northern Ireland's 15 Unionist members of the British Parliament and the overwhelming reelection of all but one, in what Unionists said was proof that the majority of Protestants were against the accord. Thatcher, however, remained unmoved.

Unionists then entered what they call the second phase of opposition. Elected Protestant officials, who hold the majority in most of the province's local government councils, have boycotted all meetings, refused to conduct official business, and pledged to make Northern Ireland "ungovernable."

As the new fiscal year begins this week, with no local budgets or property tax levies set by municipal bodies -- and the risk of local services being cut off -- there are increasing indications that Thatcher will appoint a British commissioner to take over all local government functions.

Local Unionist militants have said they were delaying the third phase of their protest, violent confrontation with the security forces, until legal methods are exhausted. But they have repeatedly threatened that the Protestant population cannot be restrained forever if Thatcher will not yield.

Today's march by the Apprentice Boys, a Unionist organization commemorating a 17th century Protestant-Catholic battle, was to be the first of this year's "marching season," when Protestants traditionally take to the streets with drum-and-fife bands. The marchers have long been controversial, as they wend their way through Catholic residential areas in what Catholics have called a provocation.

Although it was widely anticipated that police would try to circumscribe the march, the banning of the event was unexpected. Announced late last night, it caught Unionists off-guard and hundreds rushed from Belfast and other areas to Portadown, where they staged a late-night march of defiance through Catholic neighborhoods.

This morning, as march organizers struggled to formulate a protest, police staged predawn arrest raids at the homes of 28 Unionist militants, most of them members of the paramilitary Ulster Defense Association.

Although all were said to be held for "questioning," and none was charged, police implied the militants were involved in planning what was called a "sinister" plot to turn the march into a violent confrontation without the knowledge of the Apprentice Boys organization.

Police sealed entrances to Portadown this morning, but by noon thousands of men, women and children, in addition to youths, had gathered in the city's center. Unionist political leader Ian Paisley denied that violence was planned and angrily charged that the banning, and the arrests, were a "setup," designed to provoke the rioting that later took place here.

"It was set up to have a confrontation and to put the Protestants on the receiving end of the force and might of the British Army, so that Margaret Thatcher could wash her hands like Pilate" and move against the Unionists with impunity, Paisley said.

Police insisted that the banning was singular and did not apply to subsequent Protestant marches scheduled this year. But Unionist leaders repeatedly noted that yesterday's Catholic parade was not banned. Proscription of their own march, they charged, had come under "direct orders" from Dublin, as part of the Anglo-Irish agreement.