BY GLENN GARVIN

 LA FRATERNIDAD, Honduras -- ``They're nuts over there,'' said Victor Bonilla, a
 currency dealer, waving at the Nicaraguan border a hundred feet away. ``All they
 talk about is war, while our government is trying to have dialogue. But if they
 come over here with arms, we'll defend ourselves.''

 Barely a stone's throw away in El Espino, Nicaragua, Jose Antonio Lopez leaned
 over the counter of the duty-free store where he works to say that Nicaraguans
 know war too well and want no more of it: ``The injured. The dead. The bombs . . .
 No one wants that. But Honduras is provoking us.''

 But a war that no one wants may be perilously close at hand. An ancient
 argument over territorial waters has the governments of Nicaragua and Honduras
 banging their sabers loudly, with diplomats throughout the region warning that an
 accidental spark could flare out of control.

 ``We're hoping everybody cools down,'' said one diplomat. ``I can't believe either
 side wants a war, but when you shout too much, things happen.''

 But even with some officials in both governments working to calm the situation,
 Central America's legacy of suspicions and grudges is making that difficult.

 Honduras, like other neighboring countries, regards Nicaragua as the national
 equivalent of a belligerent drunk, ready to trade punches -- or cannonballs -- over
 every slight, real or imagined.

 ``The [last] thing we want to do is something that will provoke an action by
 Nicaragua,'' Honduran Foreign Minister Roberto Flores said. ``But we don't want
 them to do anything, either. Otherwise, we're in a very dangerous situation.''

 NICARAGUA BITTER

 Nicaragua, on the other hand, is still bitter about what it regards as underhanded
 land grabs by its neighbors that gave Costa Rica one big chunk of Nicaraguan
 territory in the 19th Century and Honduras another in 1961.

 ``In a country that's seen itself whittled away at the edges for some time now,''
 said one Nicaraguan official, ``you should forgive us if we have outbursts of
 xenophobia from time to time.''

 The dispute was touched off by a 13-year-old maritime treaty between Honduras
 and Colombia, finally ratified by the Honduran Congress 10 days ago after secret
 talks with Bogota. Colombian ratification is expected soon.

 The day after ratification, Nicaraguan President Arnoldo Aleman made the first of
 several furious speeches threatening a military response.

 ``There are things and strategies that we can't reveal to the news media, but
 everything -- everything -- has been considered,'' he said. ``We have very capable
 armed forces, we have very capable police, each of them in their command posts
 preparing their strategies.''

 TROOPS ON BORDER

 Honduras moved 2,000 troops to the border this week, though foreign diplomats
 monitoring the confrontation say it appears they are starting to pull back.

 Nicaragua also threatened to send reinforcements to the border, though diplomats
 say they have detected no significant movement on the Nicaraguan side.
 Meanwhile, Aleman slapped tariffs of up to 35 percent on Honduran goods,
 virtually paralyzing imports from the neighboring country.

 Tensions grew so high this week that U.S. military flights carrying hurricane relief
 supplies for the Hurricane Mitch reconstruction effort were canceled. Hundreds of
 tons of aid were left on the ground in the United States.

 MEDIATION SOUGHT

 Both governments have called for mediation by the Organization of American
 States and the United Nations. They are also quietly using American diplomats
 as intermediaries. Meanwhile, Nicaragua has filed suit against Honduras in the
 World Court.

 The treaty between Honduras and Colombia carves up about 12,000 square miles
 of the Caribbean Sea claimed by Nicaragua, an area rich in fish and -- perhaps --
 oil and natural gas. Some of the waters are within 100 miles of Nicaragua, though
 300 miles from the Colombian coast.

 But the roots of the problem go even further back, to a 1928 treaty between
 Nicaragua and Colombia. Colombia says that treaty gave it domain over the
 ocean areas under dispute. Nicaraguan officials say the Colombians are
 misreading the 1928 treaty, and they are enraged at Honduras -- a fellow member
 of several joint Central American institutions -- for siding with Colombia.

 ``Colombia has been expanding through the Caribbean at our expense since the
 1920s, using bilateral treaties with Nicaragua's neighbors like this one,'' said
 Nicaraguan Foreign Minister Eduardo Montealegre. ``Nicaragua has not accepted
 it in 60 years, Nicaragua is not going to accept it now, Nicaragua is never going to
 accept it.''

 STARTLED BY REACTION

 Honduran officials say they were startled by an unexpectedly vehement reaction
 by Nicaragua to what the Hondurans believe was a perfectly legitimate exercise of
 diplomacy between Colombia and Honduras.

 ``What we want is a good neighborly relationship with Nicaragua,'' Flores said.

 But Nicaraguan officials say Honduras should not be surprised. The Nicaraguans
 believed they had an informal agreement with Honduras that the treaty was not
 going to be ratified. They learned that Honduras and Colombia had been engaged
 in secret talks when Honduran special envoy Jorge Arturo Reyna visited Aleman
 on Saturday, Nov. 28.

 ``After a long and very friendly exchange of small talk, he drops the bombshell on
 us,'' said Francisco Aguirre, Nicaragua's ambassador to Washington. ``He says,
 `By the way, on Tuesday we're going to ratify that treaty we signed back in 1986.'
 They obviously didn't want us to have any time to do anything about it.''

 Aleman took the news as not only diplomatic treachery -- ``the Central American
 equivalent of Pearl Harbor,'' according to one official -- but a personal betrayal.
 Aleman's Liberal Party contributed money to Honduran President Carlos Flores'
 1997 election campaign, and Flores was the only foreign dignitary invited to
 Aleman's wedding.