Background: Regardless of the persistent image of rural areas in Ethiopia as a continent of subsistence farmers, over the past decades, there had been an outstanding tendency of rural economic diversification. Numerous motives prompt households and individuals to expand the range of assets, incomes, and activities. This paper is devoted to characterize rural households’ livelihood portfolios and examine the determinants of income diversification using primary data collected from two agro-ecological zones in north-western Ethiopia. To analyze, the data both descriptive and inferential statistics were used. Levels of household livelihood diversification were measured using Simpson Diversification Index (SDI). Censured regression models were employed to identify determinant factors affecting livelihood diversification. Result: The result confirmed that households in the study area collected a significant portion of their income from the diverse farm and off-farm sources. Diversification into off-farm sources contributed 35% to total household income. The result confirms that factors linked to household livelihood diversification measured in Simpsons Diversification Index (SDI) are significantly determined by household head educational status, access for tanning, age of household head, family size, livestock ownership, ox ownership, land owned, the proportion of infertile land, access for road and agro-ecologies. Conclusion: From these results, therefore due attention should be given to strengthening the role plaid by off-farm income in a rural area to facilitate the countries goal of a transformation. Therefore, policy measures need to be directed towards creating conducive conditions through the provision of education and tanning and improve households’ access to credit and improve access to a road.