A tribute to American military generosity and good intentions is posted in the middle of the teeming marketplace on this rural road, just around the corner from the "Las Vegas" and "Colorado" brothels and dozens of shops selling counterfeit CDs and other smuggled merchandise.

"Our thanks to the U.S. Army for supporting in the development of this market," says the large sign in the midst of what has been jokingly called the Wal-Mart of Bosnia but is actually one of the largest havens for tax cheats, contraband and prostitution in the Balkans.

The sign, no longer a point of pride at the nearby headquarters of the 4,000 U.S. peacekeeping troops in northeastern Bosnia, has become instead an embarrassing symbol of how some of the estimated $5 billion in Western investment in this war-wracked country has gone sour.

Here and elsewhere in Bosnia, criminal gangs--using skills gained circumventing blockades and embargoes during the 1992-95 Bosnian war--are smuggling in thousands of cartons of untaxed cigarettes and unknown quantities of illegal drugs a week. They have also established well-protected corridors for trafficking in stolen cars from Western Europe and prostitutes from Eastern Europe.

"Unofficial markets . . . have mushroomed throughout the country," said a recent European Commission report on organized crime in Bosnia. Western officials say that 40 to 60 percent of Bosnia's economy now appears to be based on black-market commerce. This has fueled the rise of a wealthy criminal class that wields enormous political influence and annually diverts hundreds of millions of dollars in potential tax revenue to itself.

Although there is little evidence of direct diversion of foreign aid to private hands, the siphoning off of public revenue has helped ensure the country's continued dependency on outside assistance for many years to come, officials say. "To me, the biggest problem [in Bosnia] is the economy . . . and linked to that is crime and corruption," U.S. Army Lt. Gen. Ronald Adams, the top NATO officer in Bosnia, said in an interview in Sarajevo, the capital.

Since 1995, when a U.S.-drafted peace accord halted 2 1/2 years of war between Bosnia's Muslims, Croats and Serbs, virtually the only economic growth stimulated here has been either through crime or the trickle-down effect of direct foreign aid, according to James Lyons, head of the International Crisis Group office here.

Criminal groups have thrived in Bosnia because ethnic enmities have hampered the formation of a government with blanket legal jurisdiction over the patches of territory administered by rival Muslim, Serb and Croat officials. "Within Bosnia today, organized crime and corruption are more serious threats to security and stability than military confrontation," said American diplomat Robert Barry, head of the local office of the 55-nation Organization for Security and Cooperation in Europe. Barry recently told a group of students that he sees an "emerging relationship" between extremist politicians, members of wartime security institutions and new criminal gangs as the biggest obstacle to democratic reform in Bosnia.

From its formal opening in the spring of 1996, the Arizona market, named for NATO's designation of an adjacent highway, was seen as a model for the rest of Bosnia. Western officials promoted the site as a cradle of local entrepreneurship that would provide an economic springboard for the rest of the country. The Pentagon funded roughly $40,000 of its start-up costs, and the market was officially established on a muddy field in a NATO-enforced "zone of separation" between former Croat, Muslim and Serbian combatants.

In the three years since, the market has grown into a sprawling complex of more than 1,000 largely wooden trading stalls that employ more than 2,500 people and indirectly support another 7,500. In a single weekend, it has attracted as many as 25,000 customers from throughout Bosnia and four neighboring nations--Hungary, Slovenia, Croatia and Yugoslavia. Most are drawn by extraordinary bargains made possible because none of the merchants pay taxes and most goods are either smuggled in or customs duties on them were underpaid.

Some officials say the Arizona market is an example of how the West's policies here--particularly its preoccupation with physical reconstruction instead of the more difficult task of orchestrating lasting economic and political reform--have fostered the enormous expansion of criminal activity. Western officials say Bosnia loses an estimated $30 million a year from untaxed sales of legal goods at the market, but some proceeds are pocketed by local police, who have helped obstruct law enforcement and tax collection. In addition, international monitors have implicated the chief of the local police force, Marko Geljic, and 21 other police officers in prostitution-related activities at the market.

But the Arizona market is not an isolated den of criminal activity in Bosnia. In the southern city of Stolac, a weekly market in cars stolen in Western Europe and brought in through Italy, Slovenia and Croatia draws thousands of customers. Zenit Kelic, who heads the nascent federal customs agency, says that license plates and registration papers are readily available for purchase from municipal officials in the town. "A huge number of police officers in Stolac are directly involved in running that crime," Kelic said of the auto-theft ring.

Western officials began contemplating serious action to clean up the Arizona market early this year when an extremist group of Bosnian Croat war veterans with close ties to hard-line government officials in Croatia began erecting a second market at the site. The founding director of the organization, Mladen Nateltilic, has been indicted by the international war crimes tribunal in The Hague, and the group has sent threatening letters to Western officials probing its business activities.

But the officials' concern grew to alarm when it appeared that the veterans group--whose symbol is a wheelchair-bound man with an assault rifle in his lap--was seeking revenues from the new market to promote nationalist aims in Bosnia.

Jacques Klein, an American who directs U.N. operations in Bosnia and oversees international monitoring of all police activities, was among those who argued at a meeting of Western diplomats last month that move to build a second market justified bulldozing the entire site.

"Its time is past," Klein said in an interview. "It is controlled by hard-line obstructionists [who oppose ethnic integration]. . . . All the structures are illegal. There are illegal auto sales, prostitution and counterfeit CDs. . . . No one knows who owns the land, and it is killing trade in neighboring areas."

So far, the idea has been rejected by other Western officials, who say the market is now so big and its beneficiaries so powerful that its destruction would touch off violence and risk NATO casualties.

Other officials noted that Robert Ferend, the new Western administrator of the Brcko municipality that includes the Arizona market, sees the site as a potential source of revenue for the municipality if its operations can be regulated and properly taxed.