BUILDING PEACE IN THE BALKANS : British Set Up NATO Post Deep in Serb Territory : Bosnia: Townspeople of Banja Luka greet peacekeepers’ arrival with mixed emotions.

British troops rolled into the heart of Serb-held territory Tuesday, receiving a subdued welcome from a people still reeling from the effects of almost four years of war.

Flying the Union Jack from light tanks and armored personnel carriers, a squadron of 140 British soldiers established the first North Atlantic Treaty Organization outpost in this teeming Serb stronghold in north-central Bosnia that may soon become the capital of the new Bosnian Serb republic.

While U.S. troops are still preparing for full deployment in Bosnia-Herzegovina, the British are moving as quickly as possible to establish a formidable presence for the NATO-led peacekeeping force on the Serb side of the cease-fire line.

“From the word go, we want to show all the parties we have the capability to react if necessary,” Lt. Col. David Shaw said. “We want to send the message that we are here to get them to implement their peace.”

A handful of children waved to the British troops as they drove through Banja Luka, but most townspeople--already accustomed to a steady stream of military vehicles--watched expressionlessly as the tanks went by.

Under an agreement with local Serb leaders, the British took over a building-supply yard near the center of town and next to an outdoor market crowded with pigs, sheep and horse-drawn carts.

The post, 15 miles from the cease-fire line, is farther inside Serb territory than any base established by the NATO-led forces. It is supported by a mobile artillery position also set up Tuesday, 10 miles to the south but within firing range of Banja Luka.

To some residents of the city, NATO’s arrival signaled that the end of the war has finally come. To others, it meant the beginning of an occupation by a foreign army.

“We are very happy, and we will feel much safer with them here,” said Vesna Bartulovic, 30, who spent the morning with her 1 1/2-year-old daughter begging for coins at the market. Her husband, a Serb soldier, was paralyzed in the war, she said, and now gets a monthly disability payment of less than $5.

“I’m desperate,” she said. “People are sick of this war. They just want a normal life.”

But NATO’s bombing of Serb-held territory in the fall is still fresh in the minds of other Banja Lukans. Many residents spent days holed up in the city’s bomb shelters as NATO planes flew overhead, hitting strategic targets in the mountains less than 18 miles from the city.

“NATO has always assisted the Muslims and Croats, and they didn’t come here to help us,” said a stocky, bearded Serb who identified himself only as Gostimir. “It’s a silent occupation.”

The arrival of NATO troops in Banja Luka carries special significance because of the devastation wrought on the city’s Muslim population by the Serbs.

Banja Luka was once a multiethnic city of 200,000 Bosnian Serbs, Croats and Muslims.

Rebel Serb forces drove out the Muslims by killing selected Muslim leaders and blowing up all 16 of the city’s mosques--including the oldest mosque in Bosnia.

Earlier this year, when the Serbs’ fortunes turned and Bosnian government forces reclaimed territory from the rebels west of the city, an estimated 300,000 Serb refugees poured into Banja Luka, and many stayed.

Banja Luka is also noteworthy because it was near here in June that U.S. Air Force Capt. Scott F. O’Grady was shot down.

He survived in the woods for nearly six days, eating insects and drinking rainwater, before being rescued by U.S. Marines.

As Serb politicians jockey for position within the new Serb Republic, some have advocated placing its capital not in Pale--where political leader Radovan Karadzic has overseen the Serbian side of the war--but in Banja Luka.

Such a decision would be a sign that Karadzic is losing the struggle for control of the postwar Serb Republic.

In Banja Luka, it is clear that the economic sanctions imposed on the rump Yugoslavia--composed of Montenegro and Serbia, the Bosnian Serbs’ main patron--have by extension had a devastating effect.

Most of the region’s factories have been shut down. Many people have not received their salaries or pensions, have lived for years without heat in their homes and have been unable to buy sufficient quantities of food.

As four dozen British vehicles rolled past the market in Banja Luka, many townspeople refused to discuss their reaction; among those who did, most would give only their first names.

“People are destroyed emotionally, financially, in every way,” said a 47-year-old man who said his name was Tomo. One of the more fortunate had come to the market to buy a pig, which he stuffed in the trunk of his yellow Volkswagen Golf sedan.

“The life is very difficult,” agreed Slavojka, a 17-year-old Serb refugee who fled here with her family from a predominantly Muslim village. Now she and seven relatives live in a two-room house.

Many Serbs recall their kinship during World War II with Britain and the United States, and they are bitter at a world view that casts their people as the aggressor in the Bosnian war.

Some are also upset that the new Serb Republic covers only 49% of Bosnian territory under the Dayton peace agreement; as recently as late summer, the Serbs controlled more than two-thirds of the country.

But they are also very tired of the war.

“I believe NATO will help a lot,” said a 64-year-old woman who gave her name as Ljubinka. “The war will finally stop.”

Since the war began, she said, Banja Luka has been a dangerous place, with many people carrying guns. Her grandson, she said, was shot on the street and wounded by one of his own countrymen.

“Even small children have guns and rifles,” she said. “It’s not safe to walk on the streets.”

In order to survive, she said, she and her husband, Vlacko, were forced to sell their two cars and many other possessions. They are avid readers, but on their pension of about $30 a month they cannot even afford to buy a newspaper.

“The war is terrible,” she said. “It was a very dirty war.”

Standing on a corner watching the British tanks go by, a Serb soldier predicted that the NATO forces will have no problem enforcing peace in the Serb Republic.

“We are very hospitable people,” said Vojko Ljuboja, 44.