LISBON, Portugal -- First, there was singing, mournful like the blues, a woman pouring out her heart in elongated Portuguese phrases.

Curious where this tortured-soul singing was coming from, my partner and I followed our ears as we descended one of the many steep, dimly lit public stairways cutting through the Lisbon's hillside Alfama neighborhood. The ancient Moorish quarter was celebrating the last days of the summertime Festas dos Santos Populares, or Feasts of the Popular Saints.We wound up at a tiny, theatrically lit plaza dominated by an austere white church and overhung with colored streamers. And there she was on a stage, holding court at a neighborhood block party, black hair pulled back in a tight bun, black shawl draped diva-like over her shoulders.

As soon as the mystery lady finished her song -- a Portuguese brand of singing called fado -- a livelier folk-dance band took to the stage and quickly picked up everybody's spirits with something resembling salsa mixed with polka.

Everyone gathered on the little square -- teenagers, yuppies with kids, grandmas still wearing their house dresses -- started to dance. The older women at one point formed a conga line, snaking across the plaza in absolute glee. The band and the chanteuse continued this musical emotional rollercoaster well past midnight.

Lisbon's balmy climate makes strolling at anytime of day or night a treat, especially in spring and summer, when locals take advantage of the good weather and bar hop in the newly hip Bairro Alto (High Neighborhood), take in outdoor concerts staged all over town or picnic on the city's famous salt cod and ubiquitous custard pastries.

And in June, during the weeks-long saints festival, each neighborhood celebrates its patron saint with parades, fireworks, music and feasts of freshly caught sardines cooked on sidewalk grills. That means stumbling upon a street party is almost guaranteed.

A city of half a million people crammed on a series of hills overlooking the point where the Tagus River spills into the Atlantic Ocean, Lisbon is short on the grand museums and monuments that lure visitors to other European capitals.

Its glory days were during the 15th and 16th century "Age of Discovery," when Vasco da Gama and other maritime explorers set off from Lisbon's shores to open commerce in Asia and the New World, making Lisbon the richest city in Europe. An earthquake in 1755 destroyed much of the town, though.

A more orderly street plan arose after the quake but, until recently, many of the palaces and townhouses lining them were in disrepair. In preparation for hosting the 2004 European soccer championships, city leaders started a massive revitalization program.

The sprucing up thankfully has not taken away from the joy of wandering Lisbon's promenades and backstreets.

The Alfama, Lisbon's oldest bairro, survived the quake largely intact and it is particularly reminiscent of the old days, with its maze of uneven cobblestone alleys, painted mosaic tiles falling off building facades and the rickety old No. 28 tram making its way along vertigo-inducing hills. The staircases connecting Alfama's heights to the lower town, or Baixa, are so steep and winding that exploring the area on foot can be disorienting -- and physically taxing. But then, just when finding your bearings seems hopeless, you'll suddenly turn a corner and catch a breathtaking panorama of the city's terra-cotta rooftops and the river beyond.

While many of Lisbon's pleasures, like strolling, are free, even those that cost money are affordable, because this is one of Europe's least-expensive capitals for tourists.

We found the best people-watching and bargain-hunting at the Alfama's Feira da Ladra, or Thieves Market, where each Tuesday and Saturday vendors scatter their wares on the sidewalks and in the streets around Campo de Santa Clara, behind Sco Vicente de Fora Church. Just as important, the fair is also an occasion for neighborhood old-timers to catch up with friends and swap the latest gossip amid the clutter.

One night while nosing around the Castelo de Sco Jorge, the ruined Moorish fortress that looms over the Alfama, we discovered that the Lisbon Symphony Orchestra, under the direction of Argentine film-score composer Luis Enriquez Bacalov, and with funding from a foundation headed by the legendary French actress Catherine Deneuve, was presenting a concert of famous movie themes inside walls of the fortress the next night.

Tickets were only 20 euro each, so we jumped at the chance to attend. It was a magical experience, with the castle lit in amber floodlights; torches lining the red-carpeted moat bridge; and clips from movies such as "Lawrence of Arabia" and "Il Postino," which Bacalov scored, projected in red or blue against the castle walls as the orchestra played.

Even more impressive, Deneuve herself showed up -- to the delight of the sold-out crowd -- to preside as mistress of ceremonies.

It was just one more unexpected thrill in a city that richly rewards aimless wanderers.

IF YOU GO:

GETTING AROUND: Lisbon is a fairly compact city set on steep hills, so getting around can be fun, or a chore, depending on your stamina. Luckily, a network of old trams criss-crosses the city, making far-away sites more accessible, and there's a reliable subway and train system. Inexpensive ferries connect the city to the southern shore of the Tagus River, where trains and buses carry beachgoers to a string of resort towns on the Atlantic coast.

WHERE TO STAY: The city offers many small, privately run inns in older buildings. We stayed at the edge of the Alfama neighborhood in a wonderful, rambling B&B called Casa Costa do Castelo (www.c-c-castelo.com), whose terraced gardens are set against the stone walls of a Moorish fortress and offer stunning views over the city. Double rooms are about $110 a night; suites with a small kitchen are about $130 a night.

WHERE TO EAT: Dining out is relatively cheap in Lisbon, with many restaurants offering simple grilled-fish dishes for about $15. The best bet is to walk around the old Bairro Alto district, where there are many chic bars, homey restaurants and fado-music taverns. Or visit the Alfama neighborhood, where the scene can be a bit touristy or pleasantly low-key. Most establishments do not require reservations, but waits can be long at the prime dining period between 8 p.m. and 9 p.m.

SIGHTS: The fortress, at the end of Costa do Castelo, is open to the public daily 9 a.m.-9 p.m. ($4 admission) in spring and summer, until 6 p.m. in fall and winter. It offers romantic views over the city and river.

The Feira da Ladra flea market is in the Alfama neighborhood at Campo de Santa Clara 7 a.m.-2 p.m. Tuesdays and 7 a.m.-6 p.m. Saturdays. From the lower town, or Baixa, take the No. 28 tram up the steep hill to Alfama and get off near the Sco Vicente de Fora Church. The market is just behind the church.

MORE INFORMATION: www.golisbon.com is the city's tourist-information site. Or contact the Portuguese National Tourism Office, 646-723-0200 or www.visitportugal.com.