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In many smallholder farming systems in the humid tropics, the slash-and-burn practice is used for land preparation. Increasing land-use intensity by shortening fallow periods often contributes to the degradation of the natural resource base of the fallow system, i.e. the fallow vegetation and soil. In the eastern Amazon region of Brazil, we therefore searched for ways to maintain the sustainability of the traditional fallow system and to adapt it to changing agro-ecological and economic conditions. We identified two major agro-ecological constraints of the traditional fallow system with slash-and-burn: (1) high losses of nutrients and organic matter during the burn, and (2), if land-use intensity increases, fallow regeneration capacity declines. As alternatives to slash-and-burn, we studied modifications to those practices recognized to be harmful to the ecological sustainability of the fallow system, i.e. mulching for the management of soil organic matter and fire-free land clearing with bush choppers to transform fallow vegetation into mulch. Mulching allows extending the cropping period, planting crops off-season, and modifying crop rotations. Additionally, biomass and nutrient accumulation of degraded fallow vegetation can be improved by enrichment plantings using fast-growing leguminous tree species. Our socio-economic analysis focused on the implications of technology change on income and land-cover change at farm and field levels. Based on farm-household data collected from 270 randomly selected households, a farm-household level bio-economic model was developed to analyze the consequences of improved access to mechanized plowing and mechanical mulching for typical smallholdings in the study area. Model simulations suggest that the costs of mulching are still very high compared to other mechanized land preparation technologies that provide similar economic benefits from the farmers' point of view. Among the recommendations to reduce mulching costs is the use of simpler mulching equipment on areas with young fallows. Technology scenarios indicate that countervailing policy measures are necessary if mechanized chopping and mulching is to bring about the desired ecological benefits. Taxes on ecologically undesirable forms of land preparation, e.g. slash and burn, are promising policy options to promote chopping-and-mulching or other fire-free land preparation techniques given that they can be provided at costs that range between 60 to 110 Euros ha−1. Tax revenues could be used for financing environmental conservation payments and/or a crop yield insurance that applies to crops that are produced using environmentally friendly production technologies. [ABSTRACT FROM AUTHOR]