MEXICO CITY (AP) _ A wooden skeleton decked out in a red bandana and sitting before a lighted incense burner stopped passers-by in the central plaza Thursday.

The hand-carved figure, surrounded by rows of giant marigolds, was part of an altar set up in a traditional celebration of the Day of the Dead.

Mexican families and organizations prepare similar altars in their homes, in cemeteries, in restaurants and museums, every Nov. 1 and 2. The altars are to honor the deceased, whose souls are said to return to visit and to take sustenance from offerings of food and drink.

The altar in the central plaza, sponsored by the Indian Peoples' National Coordinator, had another purpose as well.

''This is a way of remembering all the loved ones who have struggled for the defense of the Nahuatl Indians,'' said a young man in ceremonial dress, who introduced himself as Temilotzin, or ''Rock that Rolls.''

Written on sheets of poster board placed on the blocklong sidewalk altar were the names Cuauhtemoc, the last Indian ruler of Mexico before the Spanish Conquest in 1521, and other leaders of Nahuatl extraction.

Day of the Dead ceremonies have been held in the belief that death is part of eternal transformation, participants said. As cultures and religions have mingled in Mexico, annual offerings have changed.

Nov. 1, the Roman Catholic All Saint's Day, is dedicated to deceased children, and Nov. 2, All Soul's Day, to adults.

Offerings honored heroes of Mexico's 1810 independence from Spain, the 1910-21 Mexican Revolution, victims of a 1968 army massacre of student protesters in Mexico City and those killed in the June crackdown of the pro- democracy movement in China and in Mexico City's September 1985 earthquakes.

In statement critical of Mexican government policy, the national organization included among the dead to be remembered ''independence,'' ''democracy,'' ''collective bargaining contracts,'' and ''popular sovereignty.''

''What we want to do is create a universalist consciousness and get the government to take notice,'' said Temilotzin, who spoke in both Nahuatl and Spanish.

Forty-five people held an all-night vigil at the altar to gain strength ''from communion between ourselves and our ancestors,'' said Maria Anzures Malintzin, a Yaqui Indian religious leader.