EVER since the 1965 riots, Watts has been a symbol of urban despair. Today many of the social problems that led to the week of rioting and burning on those hot August nights persist: joblessness, illiteracy, lack of affordable housing, poor education.But slowly Watts is taking steps that shows it is more than a metaphor for urban poverty: It is a community rebuilding. Two milestones have been reached recently that deserve plaudits. One was the groundbreaking for a Denny's restaurant on the edge of the 2.5 square-mile community. Normally, the announcement of an eatery, and a franchise one at that, wouldn't be a big-ticket event. But this will be the first large, family-style restaurant to open in the area since the riots. Thus it represents more than just a sit-down alternative to fast-food outlets. It could spur other businesses to locate there too. In the years since the riots, urban renewal has brought health-care facilities, two shopping centers, public transportation, and several hundred housing units. But the 37,000 residents of Watts still don't have their own movie theater. Only one full-service bank serves the area. The second event was a "book signing" to celebrate plans to build a new library. It is something that local activists, most notably Alma Reaves Woods, an indefatigable champion, have sought for 30 years. The area has a tiny facility now, but most residents don't even know it exists. The new branch, approved by the Los Angeles City Council last week, will be built along "Charcoal Alley," the area charred during the riots. It will be an educational lantern for the community. Residents plan to use it for adult literacy classes in an area where 40 percent of the people can't read at a sixth-grade level. It will serve as a study hall for the young, many of whom end up in gangs and unemployment lines. It will feature books by blacks and Hispanics, the two predominant cultures in the area, which have been colliding as the neighborhood undergoes dramatic ethnic change. Historian Barbara Tuchman called books the "engines of change." Watts residents concur - which is why several hundred turned out to celebrate the planned library.