BOOK REVIEW : Setting Indian Legends Loose Upon a Few Lives of Today : GREEN GRASS, RUNNING WATER by Thomas King Houghton Mifflin:$21.95; 360 pages

In Thomas King’s arch fantasy about American Indians who rediscover their old values in a contemporary world, the principal roles are played by spirits.

One is Coyote, the mischievous, Loki-like figure of Indian tradition, who listens to King’s story, comments on it and intervenes by dancing near a dam that encroaches upon an Indian reserve. His dance brings on an earthquake that shatters the dam. Coyote apologizes, then subverts the apology with an unrepentant “Hee-hee-hee-hee.”

The others are four old Indians who travel around the country in the guise of bumbling hobos. They are, in fact, four primal female spirits who have been around since the beginning of the world. Their present concern is to fix up a little corner of it, namely, the little corner around the town of Blossom on the Canadian prairies.

At one point, watching a John Wayne western on a display of TV sets, they make a few adjustments. The U.S. cavalry disappears in mid-rescue, Wayne and Richard Widmark end up full of arrows and, for resplendent good measure, the old black-and-white footage is instantly colorized.

They have a hand in the dam situation as well, but what they mainly work on, when they are not arguing over mythical versions of the past, is the hearts and minds of three young American Indians who have forsaken the old ways in favor of Yuppi-

fied striving.

One of these is Lionel, who wears a gold-thread jacket to work for the boosterish white owner of the local appliance emporium. Norma, his mother, lives on the reserve and scolds him for trying to whiten himself. An even more energetic whitener is Lionel’s cousin, Charlie, who works in Edmonton for the big corporation that finances the dam. They share the affections and alternating company of Alberta. She teaches American Indian culture at the university in Calgary, but is as confused about her identity as about her lovers, and the fetus one of them has given her.

The trio converges on Blossom, partly to celebrate Lionel’s birthday, and partly for the annual Sun Dance ceremony. The four old magical Indians hitchhike there, and Coyote is not far off. To the degree that “Green Grass, Running Water” has an ongoing plot--both the title and the theme attempt to give currency to the old American Indian treaty phrase, “As long as the grass grows green and the waters run”--it deals with what happens during the visit.

The Sun Dance goes on, a renegade hippie in-law is foiled when he attempts to film it, the dam breaks. Charlie loses his job and will go to Los Angeles to take care of his father, whose broken-down career as a screen Indian has taken a sudden upturn (another bit of “fixing” by the itinerant quartet). Lionel gives up his job to rebuild an ancestral cabin on the reserve. Alberta will have her baby, and possibly marry Lionel.

All of these characters are agreeable though faintly drawn. There is more bite in the story of Lionel’s uncle, Eli. He fled the reserve a generation earlier, became a professor in Toronto, and returned after his wife’s death to fight the dam builders with injunctions, and to be swept away in the rushing water after Coyote does the earthquake dance.

Eli is a figure of some texture. His stoic resistence to the dam--”cold and ponderous, clinging to geography of the land”--has a quality of lived experience and goes beyond the facile use of symbolism. There are occasional chilling glimpses of American Indian victimization, as when a used car dealer refuses to return an Indian’s stolen truck or when Charlie’s umemployed actor father performs as a painted savage in a strip joint.

The human characters don’t have much of a chance, though. They are not so much inspired by the attendant spirits as literally shoved from spot to spot. King’s writing can be lyrical and sometimes funny, but it is not novelistic. Introducing American Indian legend into present-day lives, he is far more interested in the legend.

Much of the book is taken up by the retelling of one story in four variations. In each, a primal woman figure falls from the sky into the sea and makes her way to a 19th-Century fort in Florida where Indian insurgents were kept prisoner. From there they will roam America to assist, ghostlike, their ravaged people.

The four versions give each primal woman a different set of adventures along the way. Each takes over a white legend or tale: The Lone Ranger, Moby Dick, Robinson Crusoe and James Fenimore Cooper’s Natty Bumppo. But King’s effort to tell a folk tale in sprightly modern terms, is heavy-handed and whimsical. Its fantasy pulls a considerable didactic load.