A SMALL SKYWRITER CIRCLED ABOVE Sandringham on Christmas morning and drew two giant happy faces in the air, but on the ground the mood at Queen Elizabeth's country estate was anything but merry. "It's a Sad-ringham event," quipped the tabloid Daily Mirror, describing the parade of 19 Windsors--most of them glum-faced--as they braved chilly winds and freezing temperatures to attend church services. "You wouldn't have wanted to be in there," one spectator reported. "It wasn't the happiest of events. And it wasn't the same without Diana."

Princess Diana was back in London, dealing with Yuletide blues of her own. Wisely figuring that her in-laws would still be smarting from her revealing Nov. 20interview with the BBC--in which she had confessed to infidelity and discounted her husband's fitness to be king--she declined the Queen's invitation to Sandringham. Instead, she spent Christmas without sons Wills, 13, and Harry, 11, home alone at Kensington Palace, according to reports, nibbling pasta and watching the soap EastEnders on TV. The next day she sought solace at the home of her therapist Susie Orbach. As Di's confidante, columnist Richard Kay, put it in the Daily Mail: "It is a massive wrench for her not to be with the boys, but as Christmas got closer and closer she was dreading [being with the Windsors] more and more. She felt it would be intolerable."

A surprise Christmas gift from the Queen didn't help. On Dec. 17, the Queen messengered letters to both Charles and Diana expressing her "anger and frustration" over the public airing of their dirty laundry and advising the couple that "an early divorce is desirable." Three days later, Di had just returned from taking the boys to see the James Bond film GoldenEye and was settling on the couch to watch the 10 o'clock news when she learned the letter had been leaked to the media, apparently with the Queen's approval. "If they had wanted it to be private, she could have summoned them and had a private meeting," says noted royals author Brian Hoey. "What the Queen is saying in writing these letters is, `You tread carefully, my girl, because I have awesome powers which I can use.' "

Not the least of which is her constitutional right to supervise the upbringing of potential heirs to the throne. Di is said to have been warned that the Queen is prepared to take Princes Wills and Harry into her own custody. (Although such drastic action seems unlikely, the threat may have been aimed at showing Diana that this is a battle she cannot win.)

And the Queen is certainly willing to strip Diana of her title and royal duties. "[Unless Di cooperates], they will blank her out in every way, shape and form," says Lady Colin Campbell, author of Diana in Private. "As the mother of the next-but-one king, she has to be treated with sufficient respect to not tarnish the crown, but that is all."

Most Britons seemed to applaud the Queen's push for a divorce. ("There is almost a national sigh of relief that the end may be in sight," wrote one columnist.) But Prince Charles was probably the most grateful of all. On TV, Diana said she didn't want a divorce, so a request for one from Charles would have cast her yet again as his victim. "The Queen did him a favor," says Hoey. "He can now say he didn't press for a divorce but was obeying the orders of the Queen."

Although custody of the boys seems likely to remain as it has throughout the Waleses' separation--with Charles and Diana splitting the boys' vacation time 50-50--details, including Diana's financial settlement, her title, where she will live and what royal perquisites she may keep, all have yet to be hammered out. Despite rumors of a lump-sum payout of up to $32 million, most insiders believe Diana is more likely to receive a yearly stipend of around $1 million (about a third of the Prince's annual net income from the Duchy of Cornwall). "I very much doubt there's going to be a huge lump sum," says Hoey. "The royal family doesn't hand over money like that. They will dole it out in parcels to keep her in check."

Also at issue will be what will become of Di's vast jewelry collection, thought to be worth up to $32 million. Some of the pieces are royal heirlooms, valued up to $1.2 million, which Diana may be asked to return, along with jewelry presented to her as state gifts.

Diana's attorney Lord Mishcon, 80, whose clients have included the late newspaper publisher Robert Maxwell, was out of the country when the Queen's letter arrived and did not immediately comment on it. If Diana agrees to a settlement, a divorce could be in the works by the end of the month. If she doesn't, by law, Charles will have to wait until 1997, five years after their separation, for a divorce without her consent. For Di, says Campbell, "that's a negotiating tool."

There is speculation the Princess, who flew to the Caribbean Dec. 27, may simply ignore the Queen's letter for now, in the hope of putting pressure on the palace for a better settlement. As one "weary courtier" told the Observer Dec. 24, "In olden days we could have had her beheaded. It would save so many problems."