My favorite area has got to be the giant waterfall area with the "Okes."
Some other mentionable favorites:
-The area with the big-shoes guy that shuffles out of his house, and the lonely girl sitting on the cliff.
-The guys roasting sausage over lava.
-The city/temples in the clouds.
-The black areas with white (water?).
Also, one I almost forgot about, but really love:
-The area one screen to the right of the starting location. It contains 6 landmasses, and the swaying trees in the background. In combination with the gradient, this screen looks beautiful to me. I remember my first time playing Knytt, I moved one screen right from start, and arrived at this screen(gasps ensued). A really nice snippet of music plays here as well, which makes for an incredible wow-factor.