Valdivia [1] has numerous crafts outlets, most notably the Feria Artesanal Camino de Luna (Yungay and San Carlos). Other possibilities are the Galería Artesanal Pehuén (Arauco 340, tel. 063/251412) and the Mapuche stores La Ruca Indiana (Camilo Henríquez 772, tel. 063/214946) and Casa Araucana (Picarte 841).
Libros Chiloé (Caupolicán 410, tel. 063/219120) is a quality bookstore.
Links:
[1] http://www.moon.com/destinations/chile/sur-chico/valdivia