Twice each year, always on July 2 and August 16, the beautiful old Italian city of Siena acts out the fantasies of its medieval past and the passions of its macho present in an event that can only charitably be called a horse race. The Palio!

Ten knobby, undistinguished nags clatter, lurch, fall and scramble around the irregular perimeter of the town square — the piazza — while 30,000 spectators surrender all reason in an orgy of hysteria.

Make no mistake: beneath its colorful exterior, Palio is neither a sporting event nor even an elaborately staged touristic festival. It is a dead-serious reenactment of Sienese traditions which go back to the Middle Ages, an amalgam of religion and superstition, a piece of adult theatrics in which all the old Machiavellian arts of diplomacy, alliances, bribery and betrayal are revived. Palio is a lesson in the spiritual origins of Sienese character.

Long before the heart-pounding hour when Piazza del Campo becomes a great, packed theater-in-the-round, before throats have become hoarse and eyes red with the tears of emotion, long before this final act in the last golden light of a summer day, the people of Siena have been actors in, and the playwrights of, their own drama.

Understand: the city is divided into 17 contrade, which are social, political and religious societies, quasi-sovereign states-within-the-state. Each is ruled by its own capo, has its own church and priest, its own headquarters and museum, its own preserved relics of the centuries. Contrade make their own laws, assess taxes, guard their own security — and engage in an endless and conspiratorial process of forming alliances — or promoting enmity — among their neighbors. The closest thing to friendship between contrade is an alliance with the enemy of your enemy. This is not make-believe; it is, even today, all too real.

Contrade were once the military companies assigned to the defense of various districts of Siena when it was one of the most powerful city states in what was to become Italy. Once there were 59 of these warrior clubs. They competed ceaselessly in bloody games: "pugna," free-for-all street fighting (eventually abolished for the massacres it provoked); "mazzascudo," jousting with mace and shield; "Giogiani," battles with blunt weapons; "Cesterelli," a general brawl fought while wearing wicker helmets.

Later, these gladiatorial games were replaced by animal goadings and races staged with various creatures, such as buffalo. Eventually came horses — and what is now called the Palio.

It is a curious truth that even in today's democratic, Catholic Italy, the medieval traditions of the contrade are preserved not only in symbolism but in fact. That is the mainspring of passion that drives the Palio into the 21st Century.

Preparations for each race last three days. The piazza is fitted with grandstands and protective barriers; a dirt track is laid down. A blindfolded child (who else could be trusted?) selects the names of ten contrade to compete. (The remaining seven must wait until the second race of the summer to run.) Another child picks the names of ten nondescript local horses, one for each contrade. (If a horse dies between the day of selection and the race, its hooves are cut off and borne on a silver platter in the pre-race parade. Members of its contrade will wear mourning.)

Six rehearsal races are held. During this time of trial, the captains of each contrade negotiate for the services of professional Sicilian jockeys and enter into secret arrangements with other contrade — in effect, to fix the race. These efforts are financed from war chests of millions of lira raised from taxation within the contrade.

On race day, Siena dresses itself in flags and banners, masses are celebrated, and each of the contesting horses is led into the church of its contrade to be blessed. (Defecation before the altar is regarded as a supremely good omen; the manure will be left untouched until after the contest.)

A great procession precedes the race; flags are tossed and drums echo through the narrow streets. The "palio" itself, a banner bearing the image of the Virgin, is paraded. Brilliant silks and velvets and gleaming armor illuminate the day.

The race? Oh, yes . . .it is three laps of the piazza and lasts a minute or two. To fulfill all the bribes they have taken, the jockeys whip each other furiously and try to drive their rivals off the track.