Bulldozers yesterday plowed through one of the oldest and last shantytowns in New York City, crushing into bits of plywood and muddy rags one of the most visible symbols of homelessness in Manhattan. 

Officials said the encampment at the foot of the Manhattan Bridge -- known for an 18-foot teepee that towered over wood and tar paper shacks -- had become a fire hazard and was increasingly plagued with drugs. The site, a knoll called the Hill, was one of many semi-permanent communities created by homeless people in the 1980's in spots from Columbus Circle to Tompkins Square Park to the United Nations. 

Yesterday morning, it became the latest to be ripped down. Officials said its 50 or so occupants were uprooted for their own safety. But advocates for the homeless saw political purposes in the strike. 

 'It's Going to Be Rough Now' 

"It's been the Dinkins administration policy to get rid of any encampment that appears too visible on the political landscape," said Ted Houghton of the Coalition for the Homeless. "Unfortunately, they have not attacked any of the roots of homelessness. What we've got now is more people on the street than ever, but more spread out than ever before." 

City officials and homeless advocates both said the Hill -- known for nearly a decade as an orderly, if rough communal encampment -- appeared to be the largest remaining shantytown in the city. But it was small compared to an earlier settlement at Tompkins Square Park, where as many as 200 people lived. 

Not long after bulldozer treads bowled over the teepee's bare and charred poles -- its mailbag skin was burned off last year -- one 52-year-old resident said he would miss the Hill. 

"It wasn't the best spot in the world, but at least it was something," said the man, who calls himself Preacherman, as two machines snorted through the settlement where he lived for three years. "It's going to be rough now." 

In an effort to soften the blow to residents, city workers had visited the encampment daily since Thursday, offering alternate shelter, medical help and admission to programs for drug or alcohol abuse. About 15 residents accepted help, said Howard Salk, the director of outreach for the newly created city Department of Homeless Services. 

Advocates for the homeless said the city acted too swiftly, and the Coalition for the Homeless, which learned of the decision to raze the Hill only on Monday, tried to block the destruction in court. A judge declined a request for a restraining order, but the city agreed in negotiations to store the property of any resident who asked. 

Many shantytown residents interviewed yesterday said they wanted no part of the city's system of homeless shelters, but were also not happy about returning to the streets where many had lived before. 

"You sleep out on the street and you've got to worry about someone robbing you or setting you on fire," said Al Fell, 37, who lived in a small hut at the Hill off and on for five years. "Here, you don't have to worry about that."

 Encampment Had Changed 

The decision to demolish the Hill, which had slowly spread to cover a 20,000-square-foot lot at Canal and Chrystie Streets in Chinatown, was notable because the settlement had received so much attention in newspaper and magazine articles about homelessness. In a long New Yorker article two years ago, Joseph DePlasco, a spokesman for the city Department of Transportation, which owns the land, said the agency was taking "a reformist position" and had no plans to tear down the shanties.

Yesterday, Mr. DePlasco said the encampment had degenerated over the last year from a self-contained and self-sustaining community to one that was a threat to itself and the area around it.
"There was more filth, it was more of an eyesore, there were sanitation problems," he said.

Concern began as long ago as May 1992, when an arson fire tore through the Hill, killing a long-time resident, Yi-Po Lee, and destroying 6 of the 15 or so structures, which were often lovingly constructed and outfitted with sofabeds, televisions and hotplates.

Since then, officials said neighbors had complained bitterly about an increase in drug use and sales in the camp -- a trade which some of its residents confirmed yesterday. Last Thursday evening, as workers from the city Human Resources Administration met with residents to tell them that their homes would be torn down, a drug-related shootout erupted in the settlement.

Early last week, after meetings among several city agencies, the Fire Department inspected the camp and issued an order to vacate the property on the grounds that it was a fire hazard. Michael Kharfen, director of the Mayor's Community Assistance Unit, said the decision was not aimed at the homeless themselves nor at shantytowns but at unsafe conditions. Increase in People on Streets
"We do look at each of these situations individually and very carefully and in this case the situation had deteriorated considerably," he said. "We really determined that this was a serious and critical public safety and fire hazard."

But Mr. Houghton, of the Coalition for the Homeless, and other advocates said the Hill's destruction was part of a continuing effort by Mayor David N. Dinkins to eradicate shantytowns and disperse the homeless into smaller, less noticeable pockets around the city, to minimize them as a political issue.
He said that a survey conducted by the Coalition last year found an increase in the number of people living on the streets not long after shanties and other, less permanent homeless communities were razed at places like 72d Street and the West Side Highway, Columbus Circle, the United Nations, Tompkins Square Park, Pennsylvania Station and near the Port Authority Bus Terminal. He said that more homeless people were also living in the boroughs outside of Manhattan.

While conceding that the Hill was a fire hazard, Mr. Houghton said his homeless organization only wanted more time to place more of its residents into assistance programs.

There were fewer than 25 people in the Hill's shanties when bulldozers and dump trucks arrived at 6 A.M. For five hours, city workers searched for remaining residents and collected some residents' possessions for safekeeping. Then the heavy equipment set to work, digging out huge scoops of worn jackets, twisted bicycles and splintered plywood. Wondering Where to Go
Destruction of one section was briefly halted after workers dismantling a hut by hand heard a man inside, warning them profanely to get away from his roof. The man apparently scurried out of the shack, down a slope toward the East River, and the hut was crushed.

All day, homeless men milled around the sidewalk across Canal Street complaining that their homes where being destroyed and wondering where they would go. One man said he would return to his wife in Brooklyn. Others said they would stay in Sara Delano Roosevelt Park, across the street from the Hill. Louis Watson, 52, was reunited with his white cat, Thomas, after the animal emerged from the debris.

Mr. Watson, who lived there for seven years, peeked past the dump trucks at the opened shell of the seven-foot high hut he built himself, mostly with materials he found on the streets.

"It's been enjoyable here because you don't have to pay rent, you don't have the landlord harassing you," he said. "You want to get drunk, you get drunk, whatever you want to do."

The site will now be fenced in, and Mr. DePlasco said he hoped it would be turned into a community garden.

Photos: The oldest and largest shantytown in Manhattan falling to bulldozers yesterday at the foot of the Manhattan Bridge. The encampment's 50 or so occupants were uprooted in an early-morning action that officials said was for their own safety. (pg. B1); An 18-foot teepee towered over the wood and tar paper shacks of the largest shantytown in Manhattan yesterday, shortly before bulldozers moved in to tear down the encampment on orders of city officials.; The rubble left when the site, known as the Hill, was razed near the foot of the Manhattan Bridge. (pg. B4) (Photographs by Angel Franco/The New York Times) Map of Manhattan showing site of Shantytown. (pg. B4)