THE SLEEPY-EYED character in the well-tailored London suit casually smoked a Gauloise in the sinister shadow of the wall. He cast a cursory glance through his heavy-framed glasses at the shell-shattered buildings and laconically observed:

"There's a bloody spy up there."

Thus "Funeral in Berlin," in the further words of its star, Michael Caine, alias Harry Palmer, became "the first spy movie ever spied on."

The mystery man in the otherwise seemingly deserted Berlin building crouched at a top-story window, binoculars trained on the flood-lit scene below him.

"NEXT THING you know he'll be firing on us," cracked a cameraman before resuming his own brand of shooting along the bogus Berlin Wall. It was built for the film version of author Len Deighton's sequel to "The Ipcress File," which boosted able, affable Caine to screen fame.

On the set, it was finally determined that the Peeping Berliner was a bona fide occupant of the partially restored building, off Tiergarten Strasse, and had every right to look in on all the activities in the cul-de-sac below.

"Must be a dull night on the telly," commented a British crewman.

Later, the night-time action under director Guy ("Goldfinger") Hamilton was punctuated by clamorous assassins Sten-gunning an off-camera victim, double-dealing Johnnie Vulkan, played by Swiss actor Paul Hubschmid, who relaxed during the take in a sideline camp chair. "Bullet" holes had already been burned into his carcoat for subsequent closeups.

AT THE same time, blond, sharp-featured Caine, whose Cockney "Alfie" was a prize-winner at this year's Cannes Festival, was recounting in his Old Kent Road accent and manner — every bit as nonchalant and flippant as smooth-talking special agent Harry Palmer's — something of his army life in Korea: "It's like making a movie. You sit around for ages, sweating and smoking — then you do something nerve-wracking."

The 33-year-old former private, facially a cross between cartoon strip heroes Steve Roper and Rip Kirby, first flirted with films as a 16-year-old office boy with a production company. But the British industry hit such a slump that even office boys became too much of a luxury.

Caine, whose father was a London fish porter, then labored successively as a pneumatic drill operator, warehouseman, and cement mixer. With each job, the acting trade looked better.

His debut, after evening drama classes, was delayed by an army stint with the Royal Fusiliers. Discharged at 20, Caine marked time as a meat market hand before landing a spot as assistant stage manager for a repertory company — at $7 a week. However, he was able to work himself into some small roles.

A recurrence of Korean-contracted malaria then hospitalized him for two months. Health was restored, but the career continued rather sickly through a series of minor stage, film, and television roles.

FINALLY, producer Harry (James Bond) Saltzman saw Caine, was impressed, and signed him to a 5-year, 11-picture contract, starting with "Ipcress."

Caine's last lead endeavor and first Hollywood undertaking was with Shirley MacLaine in "Gambit." His current female foil is leggy, long-haired Eva Renzi, a 21-year-old Berlin beauty who has been described as having "the modern, swinging originality of Julie Christie, plus the classical beauty and inner glow of Ingrid Bergman."

Ruggedly handsome Hubschmid, 48, appeared in Universal productions in the early 1950s as Paul Christian. He made his reputation, however, back on the continent in a series of starring film roles. He also scored a hit as Professor Higgins in the German-speaking stage production of "My Fair Lady."

Veteran character actor Oscar Homolka is featured as the foxy Russian intelligence officer, Colonel Stok, in "Funeral in Berlin," which after 10 weeks on location in the divided city winds up with three weeks at Pinewood Studios in London. Release is scheduled for around the end of the year.