Gjeladin Sahatsiu pointed to a roofless, blackened three-story brick shell and explained that the house and four of his family's shops were burned as part of the Belgrade government's campaign of destruction that left this once picturesque city the most heavily damaged and looted in Kosovo.

His tour of the ruins was repeatedly interrupted by the sound of workmen heaving new roofing timber into the courtyard of his home and by the comings and goings of 13 relatives, who sleep in two rooms that survived the fires set by Serb-led Yugoslav forces before their departure from the city.

Sahatsiu is but one of many ethnic Albanians who have recently returned to Pec, an urban center that was largely a desolate ruin when Western officials and soldiers arrived seven weeks ago to take up peacekeeping duties after the NATO-Yugoslav war. Some aid workers said then that bulldozing much of the city seemed the only realistic solution.

Now, in what is perhaps the most impressive sign of Kosovo's capacity for resurgence, Pec is a place where the sound of hammering pierces the chatter of men clustered in coffee bars and outdoor cafes; children roller-blade in heavy traffic on its main streets; where hundreds of teenagers throng downtown squares at night; where scores of small businesses sell locks, pipe fittings, electrical wiring, appliances and other items essential to reconstruction.

"Industry and enterprise are flourishing; there are shops everywhere," said Nigel Pont, a local coordinator for the humanitarian aid group Mercy Corps International. "The bars are like Oxford Street [in London] on New Year's Eve."

Although residents of many of Kosovo's smaller villages are finding the first two months of postwar life complicated by poisoned wells, shattered homes and a lack of electricity, Pec and other urban centers in Kosovo--a province of Serbia, Yugoslavia's dominant republic--are flickering back to life. Tens of thousands of displaced ethnic Albanians and refugees have flooded back to Kosovo's cities and towns, looking eagerly for work so they can pay to repair their homes and replace what government forces looted.

But the transformation of Pec has not been founded simply on goodwill and hard work. Virtually all of the Serbs who once made up nearly a third of Pec's population have left the city. Some evidently withdrew because they did not want to live with ethnic Albanians, but many more fled because they feared revenge attacks.

Roughly a dozen Serbian homes in Pec and surrounding towns are torched on an average night, according to a recent estimate by Gen. Mauro del Vecchio, commander of the Italian brigade responsible for peacekeeping in western Kosovo. The arson attacks are spurred in part by the anger of ethnic Albanians, who say they lost in 2 1/2 months of war what they had built over decades.

By a U.N. estimate, 70 to 80 percent of the housing, shops and factories in and around Pec were seriously damaged or destroyed in the offensive by Yugoslav troops and Serbian special police units, which NATO officials say was aimed principally at the expulsion of all ethnic Albanian residents of the city--formerly one of the five largest in Kosovo.

Del Vecchio said that when Italian troops arrived here on June 13, they found "a very ugly feeling, a desert around us. There was no one in the countryside" and perhaps only a few thousand people left in the city.

Del Vecchio said refugees and war crimes investigators have told him that "atrocities were an everyday fact" here from March 28 to the end of May--brutality meant to speed the expulsions. At least 580 people in the city and surrounding villages are known to have been killed, and 250 ethnic Albanian residents of the city are missing.

Those who returned were alarmed to hear about the 205 fresh, unmarked graves in the city's main cemetery. "We have found bodies in wells, fields, rivers, streets and mass graves. We've had bodies burned in houses," said Barry Hogan, chief investigator in this region for the U.N. war crimes tribunal. "There are killing sites all over." He said 10 to 15 new burial sites are being reported daily.

But Belgrade's attempt at "ethnic cleansing" failed decisively here. More than two-thirds of Pec's prewar population of 100,000 has returned, and scores more are streaming in daily, planting Albanian flags everywhere and setting up small grills to cook and sell cevapi--the Balkan hamburger--or trade in cigarettes, gasoline, clothing and, above all, brooms.

Most people live in apartments or in first-floor or basement rooms in houses that largely survived the burning; a smaller number are sheltered in tents they brought with them from refugee camps. During the day, they clean the debris from their yards and await promised housing reconstruction aid.

"The return has been massive and fast. It caught us by surprise," said James Kovar, an official of the U.N. refugee agency in Pec.

But for Western officials who hoped the city's multi-ethnic character could be preserved, the prospects are bleak. Most of the city's Serbs have fled over the past six weeks to central Serbia or to the neighboring Yugoslav republic of Montenegro, but some migrated to the Kosovo village of Gorazdevac, four miles east of Pec. Roughly 1,000 Serbs are hunkered down there within a ring of Italian armored vehicles, meant to protect them from ethnic Albanian retribution that has already claimed dozens of victims in western Kosovo.

The Serbs are anxious partly because members and surrogates of the Kosovo Liberation Army, the ethnic Albanian militia group that waged a 16-month war against government forces, have attained substantial political power here. Dozens of former government-owned shops have been marked by KLA administrators with signs declaring them to be property of the new ad hoc administration.

The Italian peacekeeping brigade has drawn criticism from aid workers and U.N. officials because it has not made a more aggressive effort to halt the house burnings or rein in the KLA. They say that NATO should not have sent an armored brigade here, but a unit of light infantry with soldiers skilled at street patrol to deter crime.

Vedat Nalbaum, 33, is one of the thousands of ethnic Albanians who returned to Pec to find only Serb-owned homes standing. He said he has no regrets about moving his family of six into the former home of a Serbian policeman. "You should see my place," he said. "It's just flattened. Burned totally. This house was empty, and we didn't have anywhere to go. [The Serbs] went away."