It can seem at times as if Scotland long ago sold its soul to tourism. It created a culture of tartan and mist-covered mountains, of whisky and golf and warring clans, and then used these images to decorate shortbread tins.

The payback was that tourism became the largest industry, generating over £2.7 billion sterling for the economy in 1996.

But the lure of tartan and bagpipes appears to be wearing off. For the third year in a row, the Scottish Tourist Board reported a fall in the number of foreign visitors to the country, dipping by 11 per cent this year alone.

Annual revenue is down to £2.5 billion and falling. There is a growing sense of crisis about what to do, and a distinct lack of smart solutions.

Tourism accounts for nearly a fifth of the economy of the Highlands, the mountainous area in the north and west of Scotland. And that means that a lot of businesses and people are looking at an uncertain future.

Ms Myra McPherson, of the Inverness Hoteliers' Association, said: "This year it's been very poor. We really have seen a decline in the number of visitors into the area."

The current reason offered for the drop is the weakness of the euro or strength of sterling, depending on your point of view. The chairman of the Scottish Tourist Board is Lord Gordon of Strathblane, appointed to the post by his friend, the First Minister, Mr Donald Dewar. "Everyone thinks the euro is undervalued. If the cost of coming to Scotland has gone up by 30 per cent for the Italians, Spaniards, French and the Irish as well, then clearly its more difficult to persuade them to take their holidays here."

Blaming the euro is in vogue in Britain at the moment, whether to explain job closures or tourist figures. Ms McPherson thinks there is more to it than just the new currency. "Fuel prices have to be taken into consideration; there isn't a direct route for people to get into the highlands and I don't think we do enough to promote ourselves as a destination."

Scotland spends around £45 million on promoting tourism each year. More than half of that is in a direct grant to the Scottish Tourist Board, the rest comes through local government and enterprise grants. Criticism of the tourist board and the regional offices is as common as Americans at Edinburgh Castle.

Successive governments have initiated reviews of the tourist board and its structure. There were three before 1997, when Labour came into power. Two more have since been completed and another is under way. Behind the scenes ministers in the devolved government admit that something radical is needed, but so far only minor adjustments have been made.

The latest government report on tourism targeted activity holidays and the Internet as ways of increasing visitor numbers. Yet both have already come under critical scrutiny.

An independent report from the government enterprise agency revealed that the popularity of activity holidays in Scotland was, in fact, falling. Around 1.5 million people came to Scotland to ski, cycle or climb in 1993. By 1997, this had dropped to 1.2 million. This is deeply alarming for a nation that offers lots of empty countryside and stunning scenery.

The second plank of the Government's strategy was to set up a state-of-art website that, in the language of e-commerce, would offer a one-stop-shop gateway to Scotland. The Enterprise Minister Mr Henry McLeish said at the launch: "The Internet is now the most powerful marketing tool in the world and the Scottish tourist industry needs to embrace the opportunities it opens up to realise expected future levels of growth."

The minister predicted that, by 2003, Scotland could receive an extra £360 million from online bookings alone. He set a goal of 90 per cent of the country's accommodation to be trading online by 2005. The executive allocated the trade almost £4 million to help get things started.

However, angry hoteliers and businesspeople say the website doesn't work. One business on the Ardnamurchan Peninsula, the most westerly point on mainland Britain, said that the slow and clumsy site was hindering access to the industry. The tourist board has disputed these claims.

To many Scots, including the largest-selling tabloid newspaper, the Daily Record, the cause of the crisis is simple. The newspaper has been running a campaign against "rip-off" Scotland. It argues that any country which charges an average of £30 for a bed and breakfast, £15 for an evening meal and £50 for a tank of petrol is kidding itself, when a cheap flight to Spain can be had for under £100.

In a less direct way, the tourist board agrees. All its figures show that Scotland is good value for money if you are looking for a luxurious holiday of comfort and good food, or if you are travelling cheap and staying under canvas.

Where Scotland fails is in the middle market, offering poor-quality accommodation and catering. The solution to this crisis appears to lie with a Government unprepared to take radical action, and an industry resting on wilting laurels. Bord Failte staff must be whistling with joy.