This thesis was conducted in Amhara Regional State, South Wollo Zone Kelala Woreda with the aim of identifying the main challenges and prospects of ecotourism development in the study area. Three Kebeles having different potential and actual ecotourism sites were purposively selected. Both the qualitative and quantitative methods were applied in collecting and analyzing the data. The total number of the household heads of the selected Kebeles was 1526 and out of this universal population 94 sample household were selected using a random sampling method. In addition to questionnaire Key Informant Interview, Focus Group Discussion and review of secondary sources were made. This work attempted to reveal the presence of potential and actual tourism and ecotourism sites in the study area, and the main challenges of ecotourism development and the possible solutions of this challenges which hinder the expansion and development of ecotourism identified. Hence, the major obstacle of tourism/ecotourism in the areas are found to the absence of due attention towards the sector by the stakeholders. The findings of the study indicated that, the majority of (72.3%) local communities want to take part in decision making process of tourism in their local area. In general, local people want to see decisions about tourism development in their area made by consulting local people. Local communities acknowledge that tourism provides employment opportunities, encourages a variety of cultural activities and meeting tourists promotes cross cultural exchange. Therefore, the researcher recommended that, the government organizations should provide trainings, advice and loans so that local communities can participate in tourism development.Key words: Ecotourism, Tourism, Potential/Actual tourist Attraction, Tourism challenges & prospects, off-farm activity