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The traditional folk songs and unusual selection of yarns were collected by the children's book editor [Ann Durell] from various American regions and ethnic groups. The songs range from zippy (''Buffalo Gal,'' ''Yankee Doodle,'' ''Clementine,'' ''I've Been Working on the Railroad'') to melancholy (''On Top of Old Smokey,'' ''Swing Low, Sweet Chariot'') and sweet (''Billy Boy''). Ms. [DIANE GOODE] translates the pulse and mood of each into witty illustrations. The stories include the somewhat familiar (''Davy Crockett Meets His Match'' and ''Good or Bad?''), the not so familiar (''The Three Girls With the Journey-Cakes,'' ''The Talking Mule''), the humorous (''The Greedy Wife,'' ''The Twist-Mouth Family,'' ''The Knee-High Man''), the animal fable (''The Coyote and the Bear'') and the shivery ghost tale (''Wait Till Martin Comes'').