By STEVE BAILEY

''WE'LL do some four-wheel-driving today,'' Andrés de la Torre said, slipping behind the wheel of his S.U.V. We were going from Otavalo, an Indian town on the Ecuadorean portion of the Pan-American Highway, about 20 miles east to the Indian village of Zuleta, which could be described as a wide place in the road, if the roads could be described as roads.

Andrés said there were three roads to Zuleta, which is known for its embroidery workshops and the black bowler-type hats the women wear. ''None of the roads is any good,'' he said, and our road, the only one from Otavalo, was the worst. At best it was uneven cobblestone, and in many places the stones had been washed away. The government had delivered piles of replacement rocks, but the villagers and farmers had not yet repaved it.

My family and I were exploring the Otavalo region, about 50 miles north of Quito, for three days after spending Christmas week in the Galápagos Islands. This was our first trip to South America and we speak no Spanish, so we made things easier for ourselves. International Expeditions, which handled our trip, arranged for a professional guide, Andrés, to show us the markets, haciendas and mountains of the highlands.

It was New Year's Day, and pothole by pothole we were making our way around Imbabura, the soaring volcano that shields the Zuleta valley from the rest of the world, when Andrés turned onto a dirt path that he called a shortcut. ''This may not work,'' he said. ''If it doesn't, we'll have to turn back.'' It started to rain as we threaded our way among terraced cornfields and tethered cattle.

We had just gotten over a ridge and could see the valley laid out before us like a Grandma Moses painting when the truck started to slip. One side of the narrow path was a wall of rock; on the other was a deep vertical drop. The defogger wasn't working and I was wiping the windshield as Andrés drove. Ahead I could see a sharp downhill. ''You all have on your seat belts, right?'' I asked the back seat, which was occupied by my wife, Jane, my daughter, Katy, 16, and my son, Kyle, 14. I had already noticed that the 1997 Rodeo (an Isuzu that's sold in Ecuador as a Chevrolet) did not have air bags. I felt the truck sliding again.

''O.K.,'' Andrés said. ''We've got to go back.'' That meant backing up for maybe a quarter-mile, part of the way with rain pelting me as I stuck my head out the window to help guide Andrés from getting too close to the drop-off on my side of the road. Soon we were safely back on the worst of the three roads.

Zuleta itself was anticlimactic, just a few houses strung along the road. The women in the workshops, which are also their homes, showed us loads of embroidery, the sort of tablecloths and napkins and guest towels that you might receive by the box following the death of an elderly aunt. Beautiful, but not what we wanted. Jane bought a few table scarves to add to our cache of never-used table linens. Maybe her niece will like them, eventually.

The Otavalo region, cradled between two volcanoes -- Imbabura (15,026 feet) and Cotacachi (16,292 feet) -- offers more than embroidery, adrenaline-inducing car rides and spectacular mountain views. Like Quito, the region enjoys a perennial springlike climate, with daytime highs in the low 70's and nighttime lows in the 40's. Flowers bloom year-round and farmers with irrigated land can get in at least two crops each year, which is divided into two dry seasons, roughly June through September and about a month around Christmas, and a wet season the rest of the time (even then, weeks can go by without rain, Andrés said).

Poor soil and the dry climate shaped life for the Otavaleños and other Indians who were conquered by the Inca a few decades before the Spanish arrived to change everything forever. Indians and the early Spanish colonials lived in stone and adobe houses and used the spikes of agave plants to frame roofs because there was no timber. Eucalyptus, pine, cedar and palm trees have since been introduced and have naturalized into forests and groves in addition to being farmed for timber and other products. The conditions are so favorable for eucalyptus that green branches used as fence poles sprout their own new branches.

Indians remain a major social and cultural presence in Ecuador, accounting for about a quarter of the population and living mostly in rural areas and villages. The town of Otavalo is the only one in Ecuador with an Indian majority. The Otavaleños are known for their weaving, and its handicrafts market seems to be the one stop that every visitor to the region must make. Many shoppers leave with the simple woolen wraparound skirts or peasant-style blouses that are the traditional attire of Otavalo women.

Guidebooks say that Saturday is the best market day, but we were there on a Wednesday, the day after our Zuleta trip, and it's hard to imagine that many more vendors could have squeezed onto the square. Woolen and alpaca scarves and sweaters, homespun cotton pants, blankets and almost anything else that can be made on a loom was for sale, as well as simple wooden toys and handmade stuffed animals. Guidebooks also tell you to barter, but we found we didn't need to -- the minute a customer starts to walk away, a vendor offers a lower price.

Jane was looking for appliquéd wall hangings and found none, though she did buy a number of gifts including a hooded sweater for a friend's baby. Katy and Kyle explored on their own and came out with a blanket, a woven wall hanging, jewelry, woolen slippers, a sweater and more.

Two villages in the mountains north of Otavalo also offer shopping opportunities. San Antonio de Ibarra is known for the woodcarvers whose shops surround its traditional town square, and Cotacachi is Ecuador's leatherwork center, with stores and workshops stretching for blocks along its one main street. Kyle proved to be our most determined shopper, acquiring a walking stick in San Antonio and a leather backpack in Cotacachi.

The area around Otavalo is Ecuador's lake district. One of the largest lakes, San Pablo, is less than two miles southeast of town. A modern hotel, Puertolago, has been built on the shore with a spellbinding view of Imbabura, which rises from the opposite side in a succession of steeply pitched farm fields, topped by rocky slopes that disappear into the clouds.

A smaller but even more dramatically situated lake about eight miles by car northeast of Otavalo is Cuicocha, a water-filled volcanic crater in the Cotacachi-Cayapas Ecological Reserve. It's at an elevation of 10,000 feet and is 700 feet deep, with geothermal hot spots on its floor that create strong vertical currents. While taking a boat tour of the lake, which has no fish and only a handful of Andean coots, we were told of a scuba diver from Quito who was unaware he was ascending until he turned on his lamp and saw the rock face of the crater rushing by. He lost consciousness and, in an area with no decompression chambers, was fortunate to survive.

IN addition to volcanoes and lakes, the area is dotted with haciendas, many of them now family-run inns. We stayed a few miles north of Otavalo at Hacienda Pinsaqui, which has 17 guest rooms and a succession of baronial sitting and dining rooms surrounded by gardens that have been cultivated for two centuries. The house, a sprawl of Spanish colonial buildings, terraces and walkways, has been in the same horse-loving family for five generations and is studded with equestrian trophies and photos. With a Pinsaqui guide, we rode the hacienda's horses past women washing clothes in streams, through the nearby weavers' village of Peguche, through a eucalyptus grove and to the Peguche waterfall, considered sacred in pre-Inca times and used today for infant baptism. Unlike some other trail rides we've been on, we were allowed to break out of a walk, trotting at times and even galloping when we encountered hostile dogs.

At dinner on New Year's Eve at Pinsaqui, two long tables were filled by some 20 hotel guests and about the same number of family members. (Katy was surprised to find herself at dinner sitting near another 11th-grade girl from New York who turned out to be a friend of a friend.) Dinner began with a champagne toast in Spanish, followed by a selection of grilled meats accompanied by aji, the ubiquitous Ecuadorean salsa that every cook prepares differently but always with a considerable degree of heat.

After dinner, everyone went outside where effigies of men representing the old year were to be burned. We were given bags containing 12 grapes and told to make a wish as we ate each grape. A brass band loudly played for dancing and anyone standing still was at risk of being pulled into the fray. Always looking for a new partner was a masked woman dressed as the widow of the dying year; nearly every man and woman and child took a turn with her. The effigies were set afire, helped by splashes of kerosene, while the dancing was helped by slugs of the anise-flavored liquor called aguardiente, consumed from a common glass. At one point the band demanded its share. Refueled, it played on while the dancers took turns leaping over the bonfire and into the new year.

Mountain lodgings, some with volcanic views

International Expeditions, (800) 633-4734, www.internationalexpeditions.com, an Alabama company specializing in eco-trips, handled our trip to the Galápagos and (for an extra $948 a person) the extension to Otavalo. The charge included all lodgings, meals and most tips as well as the guide.

International Expeditions used Tropic Ecological Adventures, www.tropiceco
.com, in Quito for the Andean portion of our trip. Andrés de la Torre, our guide, works for Tropic. He met us at the airport in Quito when we flew in from the Galápagos. We liked having a guide like Andrés, who could help make the most of our vacation time by answering questions about local customs, handling interpretation, identifying plants and driving us wherever we wanted.

The State Department warns that since 1998, Quito and Guayaquil have seen an increase in armed robbery, assault, carjacking and kidnapping. It says most crime, like pickpocketing and theft from hotel rooms and cars, is nonviolent, although criminals are increasingly likely to be armed. Andrés said violent crime was not a problem, but that property crime was. We never left anything unattended in his car and carried as little as possible around with us. We were as comfortable in Quito and Otavalo as we are in New York.

Many of the centuries-old haciendas north of Quito have been converted to inns. Most offer horseback riding and at least some English-speaking staff. Their dining rooms, where it is hard to spend more than $12 on a meal, are the best places to eat in the countryside, with regional foods like grilled trout, roast pork, ceviche, empanadas, steak and potato-avocado soup. Always on the table is aji, the spicy salsa of Ecuador.

We stayed at Hacienda Pinsaqui, Panamericana Norte Kilometer 5, Otavalo; telephone (593-6) 946 116 and 946 117, fax (593-6) 946 117, www.haciendapinsaqui.com. Built in 1790, it has 17 guest rooms with private baths and rustic antiques; most have fireplaces. Pinsaqui is in the heart of the Otavalo region, just off the Pan-American Highway at the road to Cotacachi, a leather-goods center. A few minutes by car (or almost an hour on horseback) is Peguche, a village of weavers, who sell their goods in a couple of shops there as well as at the market in Otavalo, also nearby. Pinsaqui's rooms range from $98 to $122 with a breakfast of eggs, meat and pastries.

On the way from Quito to Otavalo, we had lunch at Hacienda Guachalá, Cayambe, Ecuador, (593-2) 236 30 42, fax (593-2) 236 24 26, www.haciendaguachala.com, one degree south of the Equator. It claims to date to 1580. It has a swimming pool in a greenhouse, as well as two old chapels and a courtyard with an Inca carving in the middle. Guachalá has 31 rooms similar to those at Pinsaqui, from $25 to $55.

We also had lunch at Hacienda Cusin, Post Office Box 123, Otavalo, Imbaburra; in the United States, (800) 683-8148, fax (617) 924-2158, www.haciendacusin.com. It's a testament to its English owner's perfectionism as well as the hacienda's 390 years of existence. This manicured and buffed complex has 45 rooms, suites and cottages, starting at $75 single, $105 double. Like Pinsaqui, it's convenient to Otavalo and Cotacachi.

Another lunch was at Puertolago, Lago San Pablo y Panamericana, Otavalo, telephone and fax (593-6) 920-920, Web site www.puertolago.net, a modern lakeside hotel with dramatic views of the Imbabura volcano on the opposite shore; 27 rooms, from $55 to $80. STEVE BAILEY