DANAO, PHILIPPINES -- Josefino Capoy proudly displayed his wares on a coffee table in his living room: a shiny U.S. Army Colt .45 pistol and a heavy Smith & Wesson .357 six-shot revolver.

They looked real enough. But the two guns and assorted other models shown to a visitor were made from scrap metal in a crude workshop behind Capoy's house in this town on Cebu island in the central Philippines. The barrels were fashioned out of thick steel pins from a junked bulldozer, crafted into working, chrome-plated handguns by Filipino employees and finally engraved with U.S. markings.

Capoy, 51, is one of thousands of underground gunsmiths who turn out copies, ranging from .22 derringers to Thompson submachine guns. Although illegal, the business has flourished here for nearly half a century and attracts customers from all over the region, including gangsters from Taiwan and Japan.

Now the Philippines' secretary of local government, Rafael Alunan III, is proposing a new approach to the illicit industry: to legalize it.

As the civilian official in charge of security matters, Alunan argues that organizing the estimated 5,000 gunsmiths in Danao into a legal "cooperative" would help authorities control gun-running and reduce the number of unregistered firearms in the country.

"The best thing to do is to legalize the illegal but very skilled gun traders so they can produce guns for export and even earn dollars as well as reduce the importation of firearms," Alunan told reporters in Manila. He expressed hope that the gun makers could eventually set up joint ventures with major American manufacturers.

It is an idea that appalls Philippine gun-control advocates and puzzles even senior police commanders. While the gun makers claim to favor legalization, police say, they do not really want the sort of controls that this would entail.

Behind the debate is a pervasive gun culture that Filipinos say was inherited from the United States, the colonial power here during the first half of this century.

The prevalence of guns has helped give Manila the highest murder rate among major cities in Asia, according to a 1991 study by the Washington-based Population Crisis Committee. With 30.5 murders a year per 100,000 inhabitants, Manila ranked as far more dangerous than other Asian cities, such as Taipei with 8.7, Bangkok with 7.6, Beijing with 2.5 and Tokyo with 1.4, the study said. The Washington murder rate, the highest per capita of major U.S. cities, is about 79 per 100,000.

"In the United States, there are so many good things we can imitate," lamented Reynaldo Pacheco, a leading gun-control activist. "Why in heaven's name should we imitate the American gun culture?"

Pacheco, an admirer of Martin Luther King Jr. and promoter of "active nonviolence," heads the Campaign for a Gunless Society. It has collected more than 1.2 million signatures on a petition calling for a ban on the carrying of guns in public places by anyone except uniformed security forces and certain undercover government agents.

That goal has aroused stiff opposition. A bill to impose such a ban was killed in a House of Representatives committee chaired by Jose Cojuangco, the brother of former president Corazon Aquino, and "Pro-Gun" bumper stickers have proliferated to counter Gunless Society ads.

Philippine gun enthusiasts also have adopted some of the slogans of the U.S. National Rifle Association. Often parroted here is the catch phrase "Guns don't kill people; people do."

Pacheco's answer to that is "Guns don't die; people do." Legalizing the local gun-manufacturing shops would be "a step backward," he said. "The solution to the gun problem is not to add more guns."

According to police, there were more than 432,000 privately owned registered firearms in 1990 in the Philippines, plus an estimated 235,000 unregistered ones, half of them homemade models known as paltiks. Police estimate that clandestine gunsmiths in Danao produce at least 5,000 guns a year.

While the bulk of these paltik guns are .38-caliber revolvers and 12-gauge shotguns, the craftsmen here also occasionally turn out more exotic wares, said Superintendent Ernesto Belen, the deputy chief of the Firearms and Explosives Unit of the Philippine National Police. Among the novelty items are pistols with 24-inch barrels and revolvers that can fire bullets for an M-16 rifle, he said.

"In most cases, the high-powered ones are quite dangerous," Belen said. "They can blow up in your hands." He said owners of paltik guns can register them legally, providing they test-fire the weapons themselves. "Our men would not want to touch one," he said.

Capoy, who has been in the gun-making business for more than 30 years, insisted his paltiks are safe and said his customers include military men. He estimated that the gun business here employs about 10,000 workers, making it a leading income earner for the area. He said his small shop produces about 15 to 20 guns a month.

Capoy said his newly made Colt .45, engraved "M1911 A1 U.S. Army" and "Ithaca Gun Co. Inc., Ithaca, N.Y.," sells for $428 -- not cheap by American standards but considerably less than a real U.S. model would fetch here. The Smith & Wesson, purporting to be a "Grand Master" model made in Springfield, Mass., sells for $250. But the standard .38-caliber revolvers, minus the chrome, cost as little as $35.