Discovering the Homespun Gentility of Lisbon : The compact and inexpensive Portuguese capital contains the treasures of an empire.

Draped lightly over the green hills above the wide Tagus River, Lisbon enjoys the loveliest of natural settings. And, like Madrid, it’s the historic capital of a once-great empire, benefiting architecturally from the riches splurged on palaces and churches.

It also turns out to be one of the least expensive capitals of Europe--about a third cheaper, for example, than the spotlighted destinations of Spain.

These days, Madrid is Iberia’s urban sophisticate. Though rapidly modernizing, Lisbon remains its quiet country cousin, and that is part of its enormous charm.

Right off the main thoroughfares, you plunge into a warren of narrow, hill-climbing streets where grocers still display heaps of fresh vegetables at curb-side and the family wash flaps overhead in the breeze. Little 19th-Century-style trolleys in the city center seem fittingly old-fashioned.

When it comes to food, Lisbon manages to serve up fresher fruits and vegetables than almost any other city in Europe. At our hotel breakfast each morning, we were treated to heaps of ripe pineapple and papayas, apparently tropical abundance from Brazil, which was a colony of Portugal for three centuries.

After checking into our hotel up a narrow cobblestoned street, we trekked back downhill to Avenida da Liberdade (Avenue of Liberty), the city’s broad, tree-lined main boulevard that cuts through the heart of town. Under one of the trees, we found an outdoor cafe, ordered a late lunch and took a look around.

There is, as I could easily see, a certain genteel shabbiness to Lisbon’s old neighborhoods, which definitely could use a couple of coats of fresh paint. And the city’s famed black-and-white mosaic sidewalks have begun to crumble and are in sad need of repair.

Only a few years ago, Portugal, like Spain, was ranked as one of Western Europe’s poorest countries. Spain apparently has reaped greater prosperity in the past decade, but Portugal’s economy reportedly has been on the upswing with the help of the nation’s European Community partners.

At Praca do Comercio (Commerce Square), a plaza ringed with historic buildings on the river’s edge, we turned around and faced inland to take in the same view as the cargo ships passing upriver behind us.

Directly ahead was Baixa, a dozen intersecting streets on rectangular flatlands at the foot of enclosing hills. Once one of the city’s major shopping districts, Baixa is somewhat less fashionable these days--although one of the capital’s most popular restaurants, Gambrinus, is found here. Many of the best shops and popular coffeehouses today are located along spiffy Rua Garrett, which links Baixa and an adjacent precinct called Chiado, just up the hill to the west.

Two of Baixa’s streets, Rua do Ouro (Street of Gold) and Rua da Prata (Street of Silver), are named for the jewelry shops that have lined them for generations.

Clinging to a steep hillside just east of Baixa is the city’s oldest neighborhood, known as the Alfama, or “Old Quarter.” It is topped by the thick walls and towers of the ancient Castle of St. George, a dramatic landmark from the Middle Ages visible from almost anywhere.

Climbing the hills on the opposite side of Baixa is Bairro Alto, another old neighborhood of narrow, winding streets. And, to complete this mental map, just north of Baixa, the Avenida da Liberdade begins its gradual ascent from Dom Pedro IV Square to the huge green expanse of Eduardo VII Park and more hills beyond.

All these distinct neighborhoods are clustered compactly, which makes Lisbon an easy city to get about on foot. If an incline becomes too steep, there is almost always a trolley to get you to the summit.

Actually, one of the city’s most famous symbols is the Santa Justa Elevator, an iron Eiffel-like tower that hoists pedestrians high up the cliff-side from Rua do Ouro to the Chiado. A nearby cable car also makes the ascent.

The route to the Castle of St. George ascends through the labyrinthine Alfama along cobbled passageways so narrow that, in places, two people cannot walk side by side. Tiny shops--barely closets cut into the wall--sell wine, soap and the other everyday goods and services of a residential neighborhood. Potted geraniums and other flowers bloom on balconies above, and in many windows, bird fanciers have set out cages of canaries.

Planted solidly on one of the city’s highest hills, the castle dates back at least to the 14th Century, although the Romans, Visigoths and Moors are known to have built earlier fortifications on the same site. Today only the crenulated walls and towers remain, and what was once the interior courtyard is now a tree-filled park.

From many vantage points, we looked down upon the city--from this view, a sort of half-bowl opened wide to the river. My first impression was of hillsides of burnt red: the color of the tiles that roofed almost every building I could see. In the distance, a black freighter was docked in the busy harbor, with another passing under a bridge to the city.

I might have spent my entire stay wandering the old streets of the Alfama and the Bairro Alto, examining the glazed tiles that decorate the many churches, peering into tempting bakeries and relaxing in one of the coffeehouses or sidewalk cafes. But Lisbon has its share of cultural treasures well worth visiting.

One of our first stops was the Calouste Gulbenkian Museum, named for an Armenian oil tycoon who found sanctuary in Portugal during World War II. At his death, he bequeathed his massive store of paintings, sculptures and other artworks to the country, and they are now exhibited in a modern museum building in Lisbon. Among the treasures are Impressionist paintings from the Hermitage Museum in St. Petersburg, which he reportedly bought from the Soviets when they needed ready cash in the 1920s.

The museum is just north of Eduardo VII Park, a long but manageable walk from Baixa--uphill all the way, of course. Many of the museum’s galleries have huge windows that face nicely landscaped garden courtyards.

The collection’s range is wide and includes sculptures from ancient Greece and Rome, and European paintings down through the centuries. But I was most interested in the tiles, ceramics and rugs of the Islamic world. Portugal has a Moorish heritage, and traces of it can be seen in Lisbon’s architecture and its abundant tile work.

We devoted almost one full day to the pretty riverside suburb of Belem, about a seven-mile, 30-minute trolley ride downriver from Commerce Square. It is the site of several attractions: a couple of historical museums, a former royal palace, the 16th-Century white-marble monastery that holds the tomb of explorer Vasco da Gama, a fortress and one of Portugal’s most important maritime monuments.

The soaring Monastery of Jeronimos immediately caught our attention. Begun in the year 1500, it is an immense Gothic structure with Moorish and Indian touches, reflecting the influence of Portugal’s great voyages of discovery during the period it was under construction.

Two years before work began, da Gama discovered the sea route around Africa to India, and in 1500, Pedro Alvares Cabral reached Brazil. The monastery is considered a tribute to the nation’s great explorers. On the river’s edge is the Tower of Discovery, a modern sculpture erected in 1960 to commemorate the 500th anniversary of the death of Prince Henry the Navigator.

Henry established a school of navigation and map-making, fostering Portugal’s exploration of the African coast and ultimately aiding Christopher Columbus’s voyages of discovery for Spain in 1492. Spain was prompted to support Columbus in part because of the example of Portugal’s maritime successes.

Just downriver is another monument to Portugal’s ancient empire, the Tower of Belem, a small, elegantly proportioned fortress completed in 1521.

Nearby are two very interesting museums--the Museum of Popular Art, which houses a large collection of colorful Portuguese ceramics, traditional costumes from earlier eras, leather work, painted wooden horse carts and other old crafts; and the National Coach Museum, which preserves many fancy coaches dating from the 16th to the 19th century.

Up the hill, about a five-minute taxi ride away, is Ajuda Palace. A former royal residence built in the early 1800s, and now a museum, it is elaborately furnished in period pieces. I was especially attracted by the beautiful porcelain chandeliers, which seemed almost frivolous in contrast to the sedate ceremonial nature of the surroundings.

GUIDEBOOK: Landing in Lisbon

Getting there: Delta and TWA offer service from Los Angeles to Lisbon, changing planes but not changing airlines in New York. TAP Air Portugal, the Portuguese national airline, offers service to Lisbon out of New York. Lowest round-trip prices on TWA and Delta from LAX are $748 for midweek travel, $798 weekends, through June 30. The price rises to $848 weekdays, $898 weekends in July-August.

We drove to Lisbon from Spain, over slow but very scenic routes. The Seville-to-Lisbon leg took five hours, the Lisbon-to-Madrid leg eight hours, with an overnight stay in Trujillo.

Where to stay: Lisbon has hotels from modest to luxurious. We stayed in a lovely 24-room hotel, the Principe Real at 53 Rua da Alegria. It sits on a steep, narrow, one-way street in a residential area of the Bairro Alto, a short walk from the center of the city. (Taxis, if needed, are easy to flag.) The rate for two is about $145 a night, including a substantial continental breakfast. Locally, phone 346-0116.

The Portuguese National Tourist Office distributes a guide to hotels that charge prices beginning at about $30 a night double.

Where to eat: Lisbon sets a very nice table, with menus both traditional and nouvelle featuring plenty of fresh seafood, fruits and vegetables. At the finest restaurants, a full dinner for two with wine, tax and tip can run $70-$135--reasonable by West European standards.

At Gambrinus in Baixa, we ordered a sizzling grilled shrimp appetizer, followed by a poached white fish in heaps of vegetables. With two bottles of wine, salad, a dessert crepe and coffee brewed at our table, the cost came to about $65 per person. Address: 25 Rua das Portas de Santo Antao.

For more information: Contact the Portuguese National Tourist Office, 590 Fifth Ave., 4th Floor, New York 10036, (212) 354-4403.