KARACHI, PAKISTAN -- Bright banners are dressing up the drab streets of Karachi, promising better water and electricity supplies as Pakistan's 100 million people prepare for local elections Monday that will do much to determine the future character of their politics.

Although candidates in this election may not run openly as nominees of a party, the vote represents a contest between the ruling, conservative Muslim League and its main opponent, the Pakistan People's Party of Benazir Bhutto. The two sides are pitted against each other for the first time in many constituencies, raising the prospect that the country's fragmented politics may be moving toward a more viable two-party framework.

With Pakistan struggling to find a solid path out of a decade of military rule, these elections are being watched carefully by political analysts and politicians for signs of how democratic institutions here have taken hold. As in the Philippines, South Korea and other nations trying to build democracy from a history of military rule, an election like this is an experimental step that poses risks to the emerging democratic process.

The Muslim League and the Pakistan People's Party (PPP) are fighting over more than local council seats. They also are jockeying for advantageous positions for national elections that are supposed to be held by 1990.

The Muslim League, which was forged last year by Prime Minister Mohammed Khan Junejo and adopted the name of the party that founded Pakistan, is trying to win enough local seats to establish a national grass-roots base that it does not now enjoy.

Bhutto, atop the party founded by her father, former president Zulfiqar Ali Bhutto, is working to demonstrate that she can rebuild her fractious opposition movement and is a serious contender for national power.

The PPP's participation, by encouraging its supporters to run, is a reversal from recent years. In 1985, the 11-party opposition alliance, the Movement for the Restoration of Democracy, boycotted parliamentary elections, saying they were illegal and a sham because they permitted only individuals -- not parties -- to take part. Last year, Bhutto failed in a campaign to force the government into holding a new parliamentary vote.

While the current elections also are technically nonpartisan, Bhutto has broken with the other opposition parties by participating. The break, on this and other issues, has left the alliance's smaller parties floundering while she sets her own course.

The leader of a small regional party, who has kept his supporters out of Monday's races, echoed past opposition arguments about President Mohammed Zia ul-Haq and his allies in the military. "Zia and the generals are still in control and everybody knows it, so what difference does this election make?" he asked.

Some in Bhutto's own party have echoed the criticism against participation, arguing that government vote-rigging would prevent them from winning a lot of seats.

"The PPP's participation spells the formal renunciation of the boycott . . . strategy pursued by the opposition in the past and is an acknowledgement that this kind of passive resistance has not worked," said political analyst Maleeha Lodhi.

"What Ms. Bhutto also appears to be conveying is that her party does not wish to play a 'spoiler's' role in any democratic process, that she is a responsible politician who is willing to strengthen and support genuine steps toward democracy."

There is a widely-held view here that Bhutto had to join the electoral fight this time or risk losing the viability of her party, an argument underscored by party elder statesman Piyar Ali Allana. "We provide an opportunity for youth to get experience," he said in an interview. "There was martial law for 10 years. Youths of 18, 19, 20 have known nothing else but martial law. They need experience for the next elections. They are the backbone of the party.

Iqbal Ahmed Khan, Junejo's Minister for local government and secretary general of the Muslim League, welcomed Bhutto's participation. "It is important that she has accepted the system, important for democracy in the country," he said. "She has changed the policy of confrontation and that is good."

It is a foregone conclusion that the Muslim League, with the advantages of holding national power, will do well in the voting, so the test for Junejo's party lies not so much in the outcome. "The Junejo government's political credibility is on the line, in the sense of being able to hold polls that are seen to be fair," Lodhi said.

Lodhi argued that Junejo's administration, installed by President Zia when he gave up direct military rule in December 1985, failed a first test of popular political credibility by cracking down against opponents last August, sending many of them to jail. "Failing this time will undermine its credibility far more seriously," he said.

Both sides have been positioning themselves for the post-election battle of credibility.

The PPP's Allana was quick to accuse the government of misdeeds. "The elections are turning into a big farce. There are reports from all over of candidates being prevented from reaching offices to register, of abrupt changes in polling sites, of the entire government machinery in many areas being ordered to support candidates of the Muslim League," he said.

While many observers believe the voting itself may be relatively clean, they said the Muslim League has been overzealous in some of its preelection maneuvers. In addition to gerrymandering and manipulation of voter lists common to many local elections, there are signs that a number of opposition candidates may have been unfairly disqualified and others intimidated or bought off to the benefit of the ruling party, according to analysts and diplomatic observers.

Iqbal Ahmed Khan said in an interview that if the People's Party does badly, it will not be because of rigging. "The People's Party failed to attract people because they failed to give a proper program." he argued. "They are living on slogans of the Bhutto family. People want more now, they want to see work."

Khan rejected allegations that the government would alter the election results, and acknowledged that the government's credibility and future are at stake. "We have seen the results of rigging a number of times. It served no purpose," he said. "All believe there should be free, clear elections to build the confidence of the people . . . . If we don't do that, we may rule for a while more, but in the long run it will be disastrous."