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On any given morning in the Ecuadorian town of Otavalo, Plaza de los Ponchos is a rainbow of textiles. Blankets, wall hangings, handbags, table runners, alpaca-wool sweaters and scarves beam as brightly as the equatorial sun, lighting up the largest and finest craft market in South America.

Crowds swarm through the square and, on Saturday mornings when the market is at its busiest, into the surrounding streets. Much of what’s on display is aimed at travellers – from pan pipes to woven wall hangings of Andean and Galapagos animals – but this is so much more than a tourist spot. The Otavalo market is a place of history and tradition, continuing centuries-old artisan practices from around this northern town.

The indigenous Otavaleño people, who make up approximately 50% of the town’s population, have been weavers since pre-Incan times. In colonial days, their skills resulted in many of them being forced into obrajes (textile workshops), creating a textile trade that continues freely today.

The scene at the market is one of contrasts, with traditionally dressed Otavaleño stallholders surrounded by a modern town centre. The 4,630m-high Imbabura volcano, which gives its name to the province, rises nearby, and the capital city of Quito is just 90km to the south, a journey that takes you over the equator and into the southern hemisphere.

On Saturdays, the craft market begins early, with stallholders setting up at around 6 am. A large animal market is held at the same time on the outskirts of the city, trading cattle, sheep, pigs, llamas, chickens, rabbits and masses of guinea pigs, turning the town into a sprawling marketplace. In the quiet of morning, before busloads of visitors begin arriving from Quito, take the chance to wander and chat with the stallholders in relative calm. Alongside the textiles, there are stalls filled with myriad other crafts, from silver jewellery to wooden carvings to Panama hats, which originated in Ecuador but became famous in Panama. The selection of crafts is extensive, and good gifts or souvenirs include woollen scarves, blankets and ponchos.

The Otavalo market is very much the public face of the region's craft industry – but it's not its entirety. Around Otavalo is a string of villages that are noted for their individual skills.

In Cotacachi, 10km north of Otavalo, craftspeople have been making leather products for hundreds of years, owing to the town's position surrounded by cattle and dairy farms. Wander the main street of Avenida 10 de Agusto, known locally as Leather Street, where over four blocks there are more than 100 boutique-style leather stores, selling jackets, trousers, bags and even shirts, many with workshops behind the display floor. It's the presence of these workshops that gives Cotacachi a rare quality in boisterous Latin America: this is a town that winds down, not up, in the evening, since so many of its residents rise early to make goods for the day ahead.

At the very northeastern edge of Otavalo, Peguche is celebrated for its weavings. Wander through the village to hear the chatter of mechanical looms at work; at the centre is Artesania El Gran Condor, arguably Peguche's most noted textile producer. Here, the entire weaving process, from the spinning of the wool to the mixing of the dyes, is done by hand – a bit of calm amid the cacophony.

All dyes in the studio, which is operated by Jose Lema and his parents, are natural. Reds, oranges and purples are mixed from lemon juice and the blood of the cochineal parasite; a local nut called nogal is ground down to make browns; the chilca bush is used – as it has been in Peguche for centuries – to create a vivid green. The results are higher-quality textiles than many of those found in the market; good purchases are wall hangings, jumpers, rugs and embroidered shirts.

Peguche also offers a break from shopping. Just a few hundred metres east of Artesania El Gran Condor is the entrance to the Cascadas de Peguche, an 18m-high waterfall that plunges out of the thick forest. A walking trail to the falls leads past a campground and through a stand of eucalypts, from which bromeliads grow, drawing their water from the spray of the distant falls.

The falls, which can be viewed from a bridge or a covered platform, are considered sacred, having been a ceremonial site for centuries. It's said that a shower in your underwear under the lower waterfall will wash away bad luck and illness, while bathing naked under the upper waterfall will cleanse your soul.

This belief gets a practical application each year during Inti Raymi, the summer solstice festival on 21 June, when pilgrims come to Peguche to bathe in the waterfall’s flow. In 2014, the solstice falls ona Saturday, meaning Otavalo will fill with two kinds of pilgrims – religious and retail.

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