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This picturesque, medieval city is open for business again just days after the first German tanks clanked down its shuttered streets in the wake of a tense, chaotic Yugoslav army retreat.

Cafe owners popped open umbrellas over sidewalks they wouldn’t have dreamed of walking only a week before–for fear of being harassed or abducted by Yugoslav security forces. Once-empty bazaars were again clogged with horse carts bringing melons and cabbages to market on beds of freshly mown hay. And dozens of shop owners were replacing their bullet-shattered display windows with shiny new glass panes–a clear gesture of hope.

With astonishing speed, the people of Kosovo are breathing new life back into their catatonic villages and cities, which have been blasted by high explosives and paralyzed by state-sponsored terror for months.

Seats were hard to find at the packed Theranda Hotel restaurant, a former Yugoslav army barracks where tables now roared with the loud conversations of fully armed Kosovo Liberation Army guerrillas, bleary-eyed journalists, unreliable-looking Albanian smugglers and families who had been prisoners in their homes for months. At the bar, waiters who had tied on their aprons for the first time since NATO’s bombing campaign began in March went about their work with relish, slipping friends and family free drinks.

In nearby Djakovica, a town whose 500-year-old Albanian Old Quarter has been reduced to cinders by the Yugoslav army and police, the mood was more subdued but hardly less focused on reconstruction.

Albanian artisans picked through the ashes of their ancient stalls, piling up the pathetic remains of their gold-smithing and leather-working shops. They paused now and then to stare in disbelief at the devastation. Nearby, meat reappeared miraculously in the freezers of a long-shuttered butcher shop. And a soda fountain owner next door was sweeping out the shattered glass from his floor and dusting off Marilyn Monroe posters.

Meanwhile, Djakovica’s main street–a ghostly scene of desolation only 48 hours earlier–bustled with shoppers poking through mounds of L&M cigarettes and Bavarian beer, an undreamed-of bonanza provided courtesy of Albanian smugglers, who stood by their trademark battered Mercedes with looks of deep satisfaction on their faces. The crush of shoppers had to be cleared by KLA guerrillas performing a duty that may become their fate in a new, autonomous Kosovo–that of civil police.

“NATO helped give us freedom with bombs,’ said one man, villager Arif Hereqi, 25. “Now we must finish the job ourselves with hard work.”

Amid the dizzying hubbub staggered men and women whose faces were reddened with weeping. These were the first trickle of refugees returning from Macedonia or Albania. They had just seen their torched homes or learned that their family members were dead.

The United Nations, helpless to prevent thousands of ethnic Albanians from abandoning refugee camps and returning to their homeland prematurely, announced Friday that it hoped to begin a mass, organized return of refugees within two weeks.

But officials said some of the 850,000 who were driven from Kosovo by Yugoslav forces during the 78-day NATO air war would have to remain outside the country for many months to come.

The announcement came as the number of refugees who have returned from Macedonia and Albania in the past three days reached 50,000.

Soren Jessen-Petersen of the office of the United Nations High Commissioner for Refugees in Geneva said he would be surprised if any refugees were left in Albanian camps by the weekend. Many of those in Albania are crossing back into Kosovo on foot, while refugees in Macedonia are coming with their own cars and tractors or in buses provided by the Macedonian government.

The UNHCR has been saying all week that the situation inside Kosovo is still too volatile and dangerous for refugees to return now. The statement on Friday could be interpreted either as intended to discourage more refugees from coming now, or as a matter of UNHCR bowing to a development it cannot control.

Jessen-Petersen said there appeared to be “significantly fewer” displaced ethnic Albanians inside Kosovo than the 600,000 that NATO estimated during the war.

As the refugees continued flooding in, the number of Serbs who have left Kosovo, many of them fearing they would be killed by the Kosovo Liberation Army if they remain, reached 50,000. That figure, supplied by the Serbian Red Cross, represents between one-third and one-half of the original Serbian population in Kosovo.

It remains to be seen how the accord reached Friday in Helsinki, Finland, defining the role of 3,600 Russian troops to be based in Kosovo, will affect the Serbian exodus.

Many Serbs do not feel secure with the NATO presence but welcome troops from Russia, a traditional friend of Serbia.

Under the accord, hammered out after days of tortuous and prickly negotiations, some 3,600 Russian troops will disperse across three of five sectors of Kosovo to be run by NATO member armies.

The fact that the Russians are being dispersed among the American, French and German sectors may help to reassure some Serbs.

The second stage of the withdrawal of Yugoslav military and police forces was completed at midnight Friday.

Roads into Serbia were crowded with a mixture of civilian and military vehicles, and Yugoslav officials said there was a 40-mile line of Serbs on the move inside southern Serbia.

British Lt. Col. Robin Clifford, the NATO spokesman, said Serbian forces were withdrawing ahead of schedule and only 10,000 of the estimated 41,000 there at war’s end remain in Kosovo.

NATO forces, he said, are now on guard in all parts of the province to protect Serbs and ethnic Albanians alike. “We are making Kosovo a safer place for every person,” he said.

British Lt. Gen. Mike Jackson, the NATO commander for Kosovo, met with leading Serbian Orthodox clergymen on Friday to underscore his message that NATO wants Serbs to stay and feel safe under NATO protection.

Clifford said NATO is stepping up foot patrols to reassure Serb civilians and discourage KLA fighters from causing trouble.

In Prizren, German NATO troops freed 15 badly beaten persons taken prisoner by the KLA when the guerrilla group took over police headquarters. The troops said they were too late to save one prisoner who died a few hours before they arrived.

The KLA claimed the prisoners were criminals. But witnesses said that two of them had been arrested by the KLA because they had been informers for the Serb police.

British forces moved for the first time into the town of Podujevo, north of Pristina, and received an emotional welcome from thousands of ethnic Albanians. They found the town devastated, its homes and shops destroyed.

As the British moved in, many Yugoslav troops departed hastily, even though the forces in that area have until midnight Sunday to leave Kosovo.