A Mexican `miracle'. A grieving and impoverished family resolutely builds a lively business that restores the livelihood of an entire town

ON the night of Sept. 22, 1985, Margarito Melchor and his wife broke down and cried in their bamboo hut here, blaming themselves for the sudden death of their son. Mr. Melchor had uprooted his family from the impoverished hills of Oaxaca State and moved to the groaning metropolis of Mexico City. He worked as a bricklayer; his wife, Teresa, was a maid; and their five children were left alone in a $14-a-month room in a run-down barrio.

Audberto, their oldest child, fell ill. Doctors scheduled an operation for Sept. 19, but a thunderous earthquake leveled parts of Mexico City that day, inundating the hospitals with thousands of emergency patients. Three days later, Audberto died.

But instead of succumbing to sorrow, the two Zapotecan Indians pulled themselves out of poverty to better tend their children, using the same resourcefulness that helped their ancestors fend off Spanish colonialism more than four centuries ago.

Margarito picked up his rusty sculpting knives. Teresa found an old paintbrush. And the whole family began producing whimsical wooden animals like those that had won Margarito a national contest 10 years earlier.

``It was a risk,'' says the soft-spoken craftsman, stopping his carving long enough to watch his 13-year-old son quickly turn an oak log into a feline figurine. ``But I swore I would never abandon my children again.''

The bold decision not only transformed their lives, but it has helped pull the dusty town of San Mart'in out of a four-year economic tailspin.

Two months later, in what Teresa calls a ``miracle,'' an American buyer in the nearby city of Oaxaca discovered their colorful creations and commissioned dozens of pieces. Their imaginative animals - everything from cats and coyotes to mythical flying dinosaurs - soon began appearing in galleries from Dallas to New York.

Now earning a healthy $80 a week (10 times the average peasant wage), Margarito has moved his family out of their bamboo hut into a spacious, cement-floored home just 20 yards away. He bought two steers, a donkey, even a feisty little dog aptly named Bruce Lee. This year his goal is to sell enough wooden animals to buy iron windows and doors.

The Melchors' inspiring story, along with the success of a few other woodcarvers in San Mart'in, has been a beacon of hope for the rest of the small farming village. With precious few jobs available, dozens of peasants have begun using their machetes as sculpting knives.

Alvino Cruz, for example, had labored for 55 years in the fields of the largest local landowner before he switched careers last year. His first carving efforts yielded nothing but ghastly snakes and crude deer.

But after Margarito showed him some carving techniques and the best kind of paint, his quality improved. Mr. Cruz now earns $4 a day instead of the $1.50 he received for his back-breaking field labor. ``Frankly, I was very poor,'' says the weather-beaten Cruz. ``My bosses gave me orders but very little money. Now I can survive.''

Many peasants like Cruz own a small plot of land, thanks to Mexico's sweeping land-reform program. But with guarantee prices low and rains infrequent, they can hardly grow enough to feed themselves.

The numbing poverty has forced millions to abandon the countryside for Mexico City and the United States. And in some secluded fields nestled into the rolling, coffee-colored hills here, it has pushed farmers to grow marijuana instead of corn. For them, it isn't a question of morality, but of survival: Marijuana yields profits up to 100 times greater than those from corn.

But the trend has shifted. Instead of exporting more drugs to the United States, the villagers are filling more and more US and Mexican shops with their distinctive wooden animals - each animated by the spirit and humor of its creator.

At the beginning of the creative process, Margarito lets his mind run free as he sifts through the pile of oak logs on one side of his dirt-floored workshop. With one gnarled log, he envisions a multiheaded Medusa. With another, he sees a howling coyote.

``The ideas come from the imagination,'' says Margarito, adjusting the worn sombrero that keeps his long, jet-black hair tucked behind his ears. ``But you have to take what the wood gives you.''

On this particular day, the wood yields a stately cat and an armor-coated armadillo.

Once father and son have carefully chiseled the final touches, the work goes to 11-year-old Arturo, who is charged with sanding it to a silky finish. Then the carving goes to Teresa, whose sense of color - and humor - turn the white wood into lively animals with character and expression.

Most of these creations are commissioned. But the Melchors always turn out a few additional animals (from $10 to $30) for tourists and buyers hearty enough to make it out to San Mart'in (a 30-minute drive from Oaxaca) and up the deeply rutted road to their home.

Teresa tells how newer carvers have stolen some of their business. ``They tell the tourists that Margarito has moved, or that their animals are better,'' she says, shaking her head.

Her own cousin even posed as Margarito for one group of unsuspecting buyers. They bought several animals, never realizing he was an impostor.

Margarito, who has given advice to about 20 carvers in the village, takes it all in stride: ``I don't feel bad, because all of us have the right to sell and make a living. We just want to make the best animals in town.''