Shellie Austin begs for money in the subway, gets Valium from a friend and sometimes spends the night with other teenagers on a littered sidewalk by the River Thames.

At 17, she is one of London's army of homeless youths whose numbers, critics of Prime Minister Margaret Thatcher claim, are being swollen by the Conservative government's radical shakeup of the welfare system.The government is determined to wean Britons off what it calls "the dependency culture." To do this, it is paying 16- and 17-year-old high school dropouts $50-$60 a week to become job trainees and cutting off welfare payments to those who don't sign up.

More than 400,000 now work for their benefits each year and gain job experience in the process. But those who don't register for a one- or two-year "YTS," or Youth Training Scheme, have been barred since Sept. 12 from "signing on" for $33 a week in state aid.

Exemptions are available to youths who suffer "severe hardship" such as disability or a violent home, and of 4,500 applications for hardship status, nearly 3,000 have been accepted.

But critics, including some members of Thatcher's own Conservative Party, have forced an acknowledgment from Social Security Minister Nicholas Scott that the reform is causing problems, and he has hinted he will broaden his discretionary powers to help those worst hit.

Conservative lawmaker Robin Squire supports this Thatcherite concept of "workfare" but opposes cutting welfare payments.

"People who have no real home should be properly looked after until they are able to get a job or a YTS course," he says.

Their only alternatives are to "either resort to crime or to begging gifts or to prostitution," he said in an interview.

Some see the issue as a test of how far Thatcher's crusade can go in revamping the 43-year-old welfare system.

Tony Morgan, who runs the New Horizon day hostel near Covent Garden in the heart of London, said young homeless often regard job training as "slave labor. They don't think they should be forced to do it."

Many come from unemployment-stricken northern England, or are fleeing broken homes, and cannot afford accommodation. The YTS has 135,000 unfilled places, yet some youngsters have difficulty finding the right slot, and others get fired because they don't get on with their employers.

"There's no transition," Morgan said. "Either it works or it doesn't work . . . Any other way you can think of to make money, they do it. Most cope very well. Of course, some go under."

Drugs and violence are endemic. Illnesses such as scurvy, scabies and tuberculosis are common. The government says London has 23,000 homeless, but welfare groups say the total is closer to 40,000 and growing.

Last year, the government ended housing subsidies for nearly 1 million poor. Grants for buying stoves and beds were changed to interest-free loans. Unemployed people under age 25 now are allowed only two to six weeks welfare if they remain in the same region.

The government allocated $36 million last summer to help London authorities renovate empty public housing and pay for homeless hostels. New Horizon still must raise $128,000 in voluntary aid this year.

"We're professional beggars," jokes Morgan.