Gen. Augusto Pinochet seized power in Chile more than 12 years ago determined to shrink the economic role of the state, which had been enlarged by the leftist government of Salvador Allende.

Adopting free market theories advanced by economic aides, many of whom were schooled at the University of Chicago, Pinochet slashed the payrolls of state-run enterprises and sold hundreds of firms to private interests. But today, the Chilean general is back where he started, with much of the economy in the government's hands.

In fact, Pinochet had, until recently, more economic control than Allende ever achieved.

What happened in Chile illustrates some of the pitfalls facing Latin American leaders bent on streamlining bloated public sectors. But Pinochet's case is most intriguing because the 70-year-old dictator now has a second chance to privatize and is approaching it with the political plotting of an avowed anticommunist tactician. Pinochet is both battling leftists in the streets and erecting barriers against them in the stock market.

Some of Pinochet's setback was just bad luck. Private Chilean banks collapsed in 1982 because foreign loans had dried up and the price of copper, Chile's principal export, had plunged. The government took administrative control of the failed banks and assumed the debts of numerous companies whose dollar obligations had grown too burdensome after the devaluation of the peso. The state thus acquired control of a major chunk of Chile's business sector.

Bad management was also to blame. Pinochet had allowed a handful of giant holding companies, using credit from Chilean and foreign banks, to pile company on top of company in a classic pyramiding operation. The pyramids collapsed three years ago, and it is taking a while to pick up the pieces.

Showing renewed determination, the Pinochet government is, for a second time, attempting to decrease state participation in the economy. Through negotiated deals with Chilean buyers, auctions to foreign bidders and the issuance of stock to numerous individual investors, the government has begun unloading banks, insurance companies, utilities and manfacturing companies that are either heavily indebted to the state or run by it. There is a not-so-hidden political aim in all this. Before leaving power, Pinochet and his military colleagues intend to restructure economic ownership in such a way as to impede any future attempt at nationalization. Central to this strategy is a program called "popular capitalism." Introduced last year, it involves distributing among a large number of investors shares in some of the companies whose debts were assumed by the Central Bank.

By spreading ownership among many people, the government hopes to make it more difficult for any future leftist government to get the companies back.

"The advantage of this diffusion of property is that you inhibit nationalization," said Rene Cortazar, an economist at the economic think tank Cieplan. "If someone tries to expropriate a company, he will confront thousands of screaming shareholders."

The government also hopes to avoid the experience of the mid-1970s when many of the Allende-era properties were concentrated in several financial groups. Two of those groups crashed in 1982.

But restructuring takes time, which is one of the arguments being put forward by junta members to justify continued military rule in the face of increased U.S. and domestic pressure to return Chile to democracy.

So far, a majority of shares in Chile's two largest private banks -- Banco de Chile and Banco de Santiago -- have been sold through "popular capitalism." So have substantial parts of two large private pension funds, AFP Provida and AFP Santa Maria.

The rest of the shares in these and other insolvent firms have been auctioned to foreign companies or placed with wealthy Chilean investors. Bankers Trust Co. of the United States bought 40 percent of AFP Provida and Aetna Life Insurance Co. of the United States holds a 51 percent interest in AFP Santa Maria.

The government is also trying to sell off enterprises that have belonged to the state for a long time. In some cases, it is offering workers in these companies a chance to buy shares.

At the time of the 1973 coup, state-run companies and the public sector accounted for 39 percent of Chile's gross domestic product. By last year the number had dropped to 24 percent, which is still far above the 14 percent before Allende took power. But that is not the whole story.

The bankrupt banks that came under the government's administrative control in 1983 had title to about a third of all outstanding loans last year. Some of those loans represented major pressure points for important companies, among them, Santiago's two largest daily newspapers. So, in assuming indirect title to these obligations, the state enhanced its economic influence. Until the sale of the banks got fully under way this year, Pinochet's effective control of the economy topped that of Allende.

Many sizable companies are still managed by government appointees. Although the number of state enterprises declined from 377 in 1973 to 35 last year, they still dominate communications, petroleum refining, electric power generation, mining and other strategically important fields.

The government owns six of the country's 10 largest enterprises. State firms currently account for 60 percent of the assets of Chile's 50 largest publicly traded corporations.

Finding buyers for state firms has not been easy. Private investors are wary of putting funds into huge enterprises with low return in a politically unstable country.

Then, too, military influence in state enterprises is strong, and some military officers resist privatization. They want to retain control of certain strategic areas of the economy, especially communications, energy and mining.

"A military management role will continue to be pervasive throughout these sectors as long as the present regime remains in power," concluded a U.S. Embassy report last year.

"There's a traditional sense in the military that they can manage everything better," said an economic expert who recently left the government. "There's still this discussion among them about what to do with some of the companies after more than 12 years in power."

While government officials are calling the "popular capitalism" program a success, others doubt that such schemes alone will be enough to guard against future socialist experiments.

"One of the challenges we face now is to give to those who bought new shares the sense of ownership, the real sense of property, that former shareholders had," said a senior officer at a major bank involved in the restructuring.

"The question is whether you are able to create a consensus in this country for private property rights," economist Cortazar said. "Popular capitalism is just a shortcut to an issue that has to be addressed directly. That would be a better guarantee for private property than all these tricks."

Sales to foreign companies have provoked particular controversy. As a result of the pension fund deals, for instance, 60 percent of Chile's pension system is now effectively in foreign hands. Government officials say the local market does not have the capacity to absorb all the properties the state is selling, so Chile has to turn to foreign buyers.

"Foreign capital is usually relied on for technology or when major resources we lack are needed," said Orlando Saenz, a former head of the industrialists' association. "But there is no reason to have foreign ownership in places we can manage ourselves, like the pension system."

Saenz also has some strong views on whether to invest in Chile these days.

"When foreign businessmen ask me what I think," he said in an interview, "I tell them: Look, my friend, you should realize Chile is a volcano. Anything is possible except keeping this situation alive for a long time. Any change in government will mean a serious shift in the economic framework under which we are living. So you need to be prepared for dramatic and deep economic change, not to mention political and social change.