Two federal undercover agents--one of them posing as a suave Mafia operative from Miami--negotiated with Chinese arms dealers for more than 16 months to bring about the largest seizure of smuggled automatic weapons in American history, federal officials said Thursday.

In releasing the first details of a sting operation that led to the arrests of seven suspects Wednesday in the San Francisco Bay Area, federal officials told a spy-thriller tale of arms-import deals gone wrong, money buried under a potted tree and the payment of hundreds of thousands of dollars to illegally import 2,000 AK-47 rifles with a street value estimated at $4 million.

While many of the suspected smugglers have direct ties to two state-owned Chinese weapons manufacturing companies, federal officials would not say whether the guns had been illegally imported with the knowledge of the Chinese Communist government. Seven other suspects remain at large in China.

Of the two weapons firms, the China Northern Industrial Corp., also known as Norinco, and Polytech, the latter supplies the Chinese military.

"Several People's Republic of China citizens charged in this are being sought, and some do have an association with government arms distributors," said Geoffrey A. Anderson, assistant U.S. attorney and chief of the organized-crime strike force in Northern California.

The wood-handled weapons were headed for street gangs in cities across America, said Michael Yamaguchi, U.S. attorney for Northern California. "The intent was to put high-powered weapons in our neighborhoods," he said. "They are often the choice of extremist groups and street gangs."

The sting came at an awkward time in U.S.-China relations, which have suffered recently because of persistent Chinese copyright violations of U.S. intellectual property, continued human rights abuses and the discovery that a Chinese company had exported to Pakistan equipment that can be used in the development of nuclear weapons.

Meanwhile, China's most favored nation trading status is due for annual renewal, and President Clinton is pressing for congressional approval despite mounting frictions in the U.S.-China relationship.

Wayne N. Yamashita, assistant special agent in charge of the U.S. Customs Service in San Francisco, said the capture of the weapons was extremely significant.

"The primary purpose for a fully automatic weapon is to kill people," he said. "It's not a hunting weapon."

The sting began in December 1994 after a Customs informant tipped the agency that Hammond Ku, a Taiwanese resident alien living in Soquel, Calif., had several thousand Chinese-manufactured weapons in crates labeled from Polytech and Norinco stored in his warehouse.

Ku told government agents that the Chinese government had "full knowledge" of the deal, according to the affidavit.

Working under the code name Operation Dragon Fire, an undercover agent from the Treasury Department's Bureau of Alcohol, Tobacco and Firearms, posing as a Mafia member, got in touch with Ku, as did an undercover Customs agent, who posed as a man who said he knew how to get around Customs officials at the Port of Oakland.

Months of tentative dealing ensued via fax and in clandestine meetings in San Francisco hotels. Both agents were white men who did not speak Chinese. One deal fell apart and another then was put together, said Yamashita.

Ku, 49, and others who facilitated the transaction said the rifles were just the beginning. They offered hand-held rockets, anti-aircraft missiles and even tanks.

"They indicated to us the source would be almost limitless," said Yamashita. The motivation of the smugglers, he said, was "purely monetary."

At one point, the Chinese arms dealers wanted the undercover agents to meet them outside the U.S.

"They wanted us to go to China," said Yamashita, "which we refused."

Federal officials would not say whether the Chinese arms dealers obtained the weapons legally in China and then exported them to the U.S. The weapons were made at the Norinco plant in Dalian, China, near North Korea. According to the affidavit, the manufacture involved the "active participation" of Norinco's vice president in China.

The AK-47s were seized two months ago in a container that had been smuggled through the Oakland port on board the ship the Empress Phoenix. On Wednesday, agents seized 500 additional firearms, including some made in the U.S. as well as China, from Ku's warehouse.

Agents then moved in to simultaneously arrest the seven suspects in a sweep from south of San Francisco to Sacramento.

Of the seven, one was a white male from the Sacramento area, Kenneth Taylor, while the rest were either resident aliens or Chinese-Americans. Taylor's role was to provide the means to convert the rifles from semi-automatic to fully automatic, officials said.

Others arrested included Linda Huang, 55, who is Ku's sister, who put 47 sample AK-47 rifles in her luggage on a plane from China to the U.S. for her brother, according to the affidavit. Clearing the sample shipment through Customs was set up as a test for the undercover Customs agent. He passed.

Ku picked up the suitcase from an airport locker. Under their agreement, Ku then left $500 under a potted tree as payment for the undercover agent.

Huang also used her travel agency to arrange for tickets for Ku and an aide to travel to China for negotiations.

Chinese citizens named in the complaint include Qi Feng, who brokered the deal between the undercover agents and Norinco representatives; Lu Yi Lum, assistant president of Norinco, and two other Norinco officials.