The mayor of Seattle yesterday canceled his city's gala millennial event at the famed Space Needle because of fears of a terrorist threat, as jitters about safety on New Year's Eve heightened security at large events around the nation.

Seattle already has been buffeted in recent weeks by street riots during World Trade Organization meetings there, as well as the Dec. 14 arrest at the nearby Port Angeles border post with Canada of an Algerian national driving a car laden with bomb-making ingredients. Bearing all that in mind, Mayor Paul Schell announced yesterday that he'd rather be safe than sorry.

The FBI "can't assure us there is no risk," Schell told reporters. "At a time when the city is recovering from WTO and heightened anxiety, adding another layer of uncertainty was not a prudent thing to do. . . . Obviously there are those who would say we are caving in to terrorism, but I'm concerned with the safety of our citizens."

No other city has taken such drastic action, but the move by Seattle reflects the high alert of officials across the nation following a spate of arrests of terrorism suspects in the United States and abroad, as well as a cascade of warnings, starting with President Clinton, that Americans should be cautious during this potentially volatile period.

Heightened security is most prominent where crowds are expected to be largest. For Seattle, that was the Space Needle, expected to draw 50,000 until yesterday's announcement. For the District, that means celebrations on the Mall. In New York, it's the traditional dropping of the ball at Times Square, which is expected to attract as many as 2 million people--including a liberal sprinkling of FBI agents and undercover officers.

Officials in New York and the District say they have no specific terrorist threats to contend with and believe they have security well in hand for the revelers, whom they are encouraging to come out to celebrate the dawn of the year 2000. Neither city plans to scale back any aspect of their millennial bashes.

"The place we're going to be on Friday night will be the safest place in the United States," George Stevens Jr., co-producer of the Mall celebration, said yesterday at a news conference.

New York officials were equally adamant that the show would go on.

"If you start altering your habits, then the terrorists are winning," said Marilyn Mode, a deputy New York police commissioner.

Both cities are accustomed to offering vigilant security for heads of state and sensitive public and private installations. But still, there was room to ratchet it up.

Following the arrest of the Algerian near Seattle--and the subsequent arrest, at a border crossing in Vermont, of a woman with suspected terrorist ties and her Algerian passenger--police of the Port Authority of New York and New Jersey, using bomb-sniffing dogs, began randomly stopping and searching trucks and vans going into John F. Kennedy International Airport in Queens and Newark International Airport. So far, they have found nothing.

District officials say they too are focusing on suspicious vehicles parked near potential targets in the nation's capital, as well as strange packages and anyone acting peculiar.

"We stepped things up a couple of days ago when the rhetoric stepped up," Terrance W. Gainer, executive assistant D.C. police chief, said of reports that the District was among cities that may have been targeted by terrorists.

But the heightened vigilance about security also has sparked fears that some people are getting paranoid--and concerns that the paranoid are focusing their attention broadly and unfairly on people of Arab descent.

Into this category may fall the Capitol Hill gas station attendant who called police last week to report a van bearing two men of presumed Middle Eastern appearance who wanted to pump their own gas rather than have an attendant do it. That report prompted a manhunt and lead stories on local TV newscasts of police in the Washington region on the lookout for this suspected terror van. A van of a similar description was later stopped in New York, but no one was arrested and no explosives were found, an FBI spokesman said.

Recalling the mistaken early reports that the 1995 Oklahoma City bombing had been committed by Muslim extremists, the Islamic Center of Long Island faxed a message to numerous congressional, religious and civil rights groups last week to warn against ethnic typecasting in the current set of cases. Two white Americans ultimately were convicted in the federal building blast that killed 168 people.

The fears of a terrorist strike come on top of the already high anxiety throughout society over how well the nation's computers will roll over into the year 2000. Hundreds of millions of dollars have been spent at all levels of government and private industry to prevent glitches that could occur if computers read the digits 00 to mean 1900. In addition, millennial fears have strong biblical bases for those who believe the Book of Revelation scenario in which fire and brimstone will precede the second coming of Christ.

The combined effect of these anxieties could be that many people will stay away from large public events on New Year's Eve and the following day. A poll released in New York City yesterday said most New Yorkers will not go to Times Square, which presumably will be thronged by out-of-staters and tourists.

In the West, ticket sales for the usually popular New Year's Day Rose Bowl football game and parade in Pasadena, Calif., are way down, said John Schultz, president of Front Row Center Ticket Service. He said a jumble of confusing New Year's signals--besides higher-than-normal prices for hotel rooms--may be keeping people away from the Rose Bowl.

"Y2-this, Y2-that. I've just heard enough of it," Schultz said.

In Seattle, meanwhile, sculptor Carl Smool was fuming. He had designed an elaborate papier-mache installation of huge figures, including the Four Horsemen of the Apocalypse. Modeled on the fire festivals of Valencia, Spain, the figures were to be set afire as part of the millennial countdown.

Yesterday, Smool lamented his canceled event. "Are we that paranoid that we really think there's some right-wing Armageddon conspiracy?"

The answer that Schell offered during his news conference was to a different and more fundamental question. Said Schell, "We weren't confident we could protect everyone at a city-sponsored event."

Duke reported from New York. Staff writers Liz Leyden in New York and Petula Dvorak and Teresa Wiltz in Washington, and special correspondent Khiota Therrien in Seattle, contributed to this report.

CAPTION: Seattle Mayor Paul Schell, flanked by city council members, announces cancellation of New Year's Eve celebration beneath the Space Needle.