MONTEVIDEO, Uruguay (AP) _ It began with rural women passing on the traditional crafts of knitting and weaving, grandmother to mother to daughter.

Today it is a $4-million-a-year business cooperative, shipping colorful sweaters around the world, including the United States.

Manos del Uruguay (Hands of Uruguay) is made up of 18 rural cooperatives whose workers spin, knit, weave and dye virgin wool, one of Uruguay's top commodities, entirely by hand.

It was founded in 1968 by Sara Beisso and four other members of Uruguay's high society who had second homes on ranch estates outside Montevideo.

Unemployment was high in South America's smallest republic at the time, so the five devised a way for rural women to do what they knew best - weave colorful sweaters using natural vegetable dyes and Uruguay's virgin wool.

The result is a richly colored wool woven in bright, distinctive sweaters, as well as in rugs, tapestries and placemats. Each article bears the name of the artisan and where it was made on a card accompanying the product.

Finding many of the artisans' work sites on a map is often difficult: they include Tacuarembo, said to be the birthplace of famed tango singer Carlos Gardel, and villages such as Los Mellizos and Quebracho.

One thousand workers in more than 40 sites, some using just a loom or a table under a tree, labor over the sweaters, tapestries and rugs. Each sweater takes 12 to 28 hours to finish, Mrs. Beisso said.

Most of the sweaters end up in shops in neighboring Argentina, but many are shipped to the United States, Italy, Japan and Belgium. Seventy percent of Manos' sweaters are exported, said Maria Orfila Algalarronda.

Ms. Algalarronda, 36, was with Manos from its start, weaving from the village of Paso de la Cruz. Two decades later, she is secretary counsel of the seven-member directorate (five women, two men) that oversees Manos' operations from Montevideo.

Now one of Uruguay's largest exporters of wool, Manos is well-regarded in business circles for the quality of its work and fashion acumen.

''Manos is an experience that's practically unique in the world,'' Ms. Algalarronda said in an interview. ''The world is a very competitive place and Uruguay is a very small place. But at a minimum Manos has turned into a source of work for 1,000 women.''

Each sweater, which costs the equivalent of about $30 in Uruguay, sells for up to $300 in the United States or Japan, said Maria Cecilia Fernandez, an aide in the promotion department of Manos' main office in the oldtown section of this capital city.

In the United States, Manos sweaters can be found in some Saks Fifth Avenue and Ann Taylor stores, Mrs. Beisso said. Manos recently opened a small showroom in New York City.

Ms. Algalarronda said 50 designs are ready for the 1989 summer collection, including sweaters specially made for Japan (''smaller sizes because the Japanese are smaller''), the United States (''simpler designs'') and Spain (''reds and blacks are popular'').

A specially designed sofa that Pope John Paul II used at a Mass in Salto, Uruguay, on his visit in May was produced by Manos, Mrs. Beisso said.

Manos is set up so that regional leaders from each cooperative elect representatives who then report to the directorate in Montevideo. All business decisions, from designs to marketing and exports, are made only after receiving input from the interior, Ms. Algalarronda said.

Any profits - 1987 sales were $4 million - are plowed back into the business, helping keep those workers employed, which was the founding purpose of Manos.

''It's a fine source of employment but not a good business,'' Mrs. Beisso said. ''The people in the country are the ones who really profit from this.''