By STEPHEN KINZER

WHEN I lived in Nicaragua during the war years of the 1980's, I often lamented Granada's fate. Once the country's stately capital, it had fallen on hard times. Many of its aristocratic families had fled, and their grand colonial-style mansions were crumbling. Walking through the shabby streets and along the shore of nearby Lake Nicaragua, I thought that with a little money and ambition, this city could be returned to its glory.
In the last few years, that has begun to happen. Granada, founded in 1524 and said to be one of the oldest cities in the Americas, has become a wonderfully rewarding place to visit. Mansions and churches have been restored and painted in soft pastel colors, monuments have been polished, and new restaurants and hotels have opened, I discovered on a three-day visit last March. The cloud forest on Mombacho, the great volcano that towers over Granada, beckons hikers, bird watchers and orchid lovers. Motor launches are ready to take people on tours of the lake, which is more than three times the size of Rhode Island, and its more than 350 small islands, each a miniature jungle wonderland.
 

Visitors to Nicaragua usually land at the Managua airport, but Managua, devastated by an earthquake in 1972 and still among the ugliest capital cities in the hemisphere, has little to offer. Granada, however, is an hour's drive south. The road passes through two towns known for their handicrafts, and when I made the trip, I stopped at both. In Masaya, just 20 minutes south of Managua, I was tempted by a set of wood-and-wicker rocking chairs but finally decided that, although they could be taken apart, they would be too unwieldy to take home; I settled for a colorful hammock instead. It cost less than $20, a reflection of how inexpensive Nicaraguan crafts can be. A few miles farther along is San Juan de Oriente, one of the country's best-known ceramics centers. At a cooperative just a few steps off the main road, I bought a ceramic dish painted with an intricate pattern copied from a pre-Columbian design.

A short while later I was in Granada's impressive central plaza, which is surrounded by magnificent old buildings, some from the 16th century. Among them are a cavernous Colonial-era cathedral with three soaring steeples and several imposing two-story 19th-century mansions; I could easily imagine flirtatious señoritas looking down from their balconies and waving their handkerchiefs to passing gallants. A plaque on a mansion is inscribed with a famous verse that sums up the city's appeal; it asks people to be generous to blind beggars ''because there is nothing sadder in the world than to be blind in Granada.''

In the plaza itself, people were taking the sun on benches near the bandstand, munching on snacks or sipping drinks bought from pushcart vendors. Horse-drawn carriages waited to take the few tourists in town on tours, or local people on their daily errands. For more ambitious trips, there are taxis, most of them modern but a few big-finned relics from the 1950's.

Half a block from the plaza is the Colonial Hotel, which opened two years ago. A new building centered around a courtyard with a small swimming pool, it is built in the traditional style. With 27 rooms the Colonial is a quiet place, but I chose to stay at an even smaller hostelry on the other side of the plaza, La Casona de los Estrada. Set in a historic 18th-century building, it has been carefully renovated and offers all modern conveniences in its six rooms. The owner, Nelson Estrada, had intended to make it his private home, but as the renovation proceeded he changed his mind.

Granada, a city of 58,000, is laid out in a grid, and most of its attractions are within easy walking distance of the plaza. One of the most popular is the San Francisco church and cloister, founded in 1529 and reconstructed in the 19th century. It was a residence for monks, and Bartolomé de Las Casas, the first Spanish defender of Indian rights, once preached here. I made my way straight to a small museum that has been created inside, with its awe-inspiring collections of ancient statues. These brooding stone figures, ranging from 5 to 10 feet in height, were chiseled by Indians about 1,000 years ago on an island in Lake Nicaragua. They depict strange man-animal combinations, such as a man who either has the features of a crocodile or is carrying one on his head. No one is sure what they mean or how they were used.

''They are plain, simple and severe, and although not elaborately finished, are cut with considerable freedom and skill,'' wrote E. G. Squier, an American explorer and diplomat who uncovered them in the 19th century on the island where they were carved. He speculated that they were objects of worship, perhaps part of a fertility cult. Some of them, he said, ''conveyed so forcibly the idea of power and strength that they might have been used as a study for Samson under the gates of Gaza, or an Atlas supporting the world.''

These eerie statues hint at the drama of Granada's history. For most of the 19th century, two political factions jockeyed for power in Nicaragua: the Liberals, based in the western city of León, and the Conservatives, based in Granada. The capital moved according to which faction had won the latest war or election, and so the country was often governed from Granada. A manse facing the plaza, now open to the public, was once the Granada Social Club, and it is easy to picture Conservative patriarchs sitting in its high-ceilinged parlors over rum and cigars, planning the nation's future.

It used to be possible to reach Granada by boat from the Caribbean; vessels would sail up the San Juan River, which is now barely navigable, cross Lake Nicaragua and dock at the Granada pier. This geography was the city's blessing and curse. It brought prosperity and a cosmopolitan air, but also attracted invaders. Several times pirates sacked Granada, most notably Henry Morgan in 1665. In the 1850's the city suffered its most bizarre attack, led by a mad American adventurer named William Walker who not only seized it but also proclaimed himself president of Nicaragua.

Walker planned to use Granada as a base from which to build a Central American empire, and troops from Nicaragua, Costa Rica, Honduras, El Salvador and Guatemala joined to attack him before he could carry out his plan. He held out for while, but was finally forced to flee in 1856. Before doing so his men set fire to the city, and one of them left behind a sign reading ''Here Was Granada.'' The city has long since been fully rebuilt, but there are still a few reminders of Walker's occupation. One is a statue of a priest named Rafael Villavincencio who is said to have rushed into the burning cathedral to rescue a sacred chalice.

The area around Granada was one of the few parts of Nicaragua that was not directly affected by the civil war that tore the country apart during the 1980's. Like the rest of the country, it suffered from decay and neglect, but there was no fighting in the region. Although Granada has not escaped the poverty that has overwhelmed Nicaragua, it is in better shape than almost any other city in the country. Tourists are welcome and -- as in the rest of the country -- there have been few reports of the robberies and assaults that have kept tourists away from some other parts of Central America.

Lake Nicaragua is famous for having some of the world's only freshwater sharks, although only a few are believed to survive. But the lake's tastiest fish, the guapote (pronounced wa-PO-tay) is still thankfully abundant. I enjoyed it at several meals, including one at a restaurant directly overlooking the lake. Shrimp, steak and other local dishes are also available at very low prices. There are a few fine restaurants, including one at La Casona de los Estrada, but most range from simple to dirt-floor primitive. But many of the most unpretentious places serve wonderful food.

One morning I resolved to find a nacatamal, the most typical of Nicaraguan foods. By tradition nacatamales are available only on weekends and only early in the morning, and in Granada women sell them at stands in the marketplace near the central plaza. A pork-and-rice casserole flavored with onions and spices, nacatamal is always served wrapped in a banana leaf. Mine was as tasty as those I remembered, and after one bite I felt I was truly back in Nicaragua.

SHORTLY after, I set out for the lake. Launches are available along the shore, either by the hour or the day. Skippers will give you a leisurely ride or take you to an island and pick you up later; this allows time for either a picnic or, if you choose one of the inhabited islands, a meal in a rustic restaurant. These islands are riots of color, each a small, lush rain forest reminiscent of Gauguin's South Seas paintings. Many are populated by parrots, monkeys and giant turtles, with fishermen sitting lazily on rafts offshore. I stopped on one island where visitors can climb onto the walls of a ruined 18th-century fort built to repel pirates, and then swam around another island in water that was warm and brackish.

On the way back to Granada, my skipper told me that several of these islands are for sale, and confided that he could arrange a bargain price.

If you go

A rental car is the ideal way to travel between Managua and Granada; the road is good, and rentals at the airport begin at about $55 a day. Information: Nicaragua tourist office, (800) 737-7253. To call Nicaragua, dial 011, then the 505 country code.

Lodging

The Colonial Hotel, Calle La Libertad, (505) 552-7581, fax (505) 552-7299, Web site www.nicaragua-vacations.com, charges $50 for a single; double, $65; suite, $100, at 14 Cordoba oro to the dollar.

At La Casona de Los Estrada, Calle El Arsenal, (505) 552-7393, fax (505) 552-7395, www.casonalosestrada.com.ni, singles are $50, doubles $75, with Continental breakfast.

There are plenty of much cheaper and quite decent places in town, among them the Hospedaje Cocibolca on Calle La Calzada, (505) 552-7223, where a plain, clean room with two beds and bath costs $10.

Restaurants

For lakeside dining with a panoramic view (and an air-conditioned room that is welcome on hot days), the Terraza La Playa, (505) 552-2213, 500 yards from the entrance to the lake park. Guapote is $5 to $9.60; shrimp with garlic, $9.60. Local beer is available.

In the city, a favorite place that also delivers to hotels is Las Colinas Sur, (505) 552-3492 in the Saboneta neighborhood. Try the avocado salad ($3), guapote ($9), tongue ($5.35) or steak from the local herd ($6.80).

Touring

Tours of the region ranging from a day to two weeks, including treks on the Mombacho Volcano, are offered by ORO Travel, (505) 552-4568; www.orotravel.com. STEPHEN KINZER