Is it possible to cancel out echo when using a bluetooth handsfree? Equipment used:
I just bought a cheap Bluetooth handsfree from china: http://www.miniinthebox.com/mini-stereo-wireless-v3-0-headset_p1187467.html

Explanation:
This works perfect for me, and i don't notice any problems at all.
The problem is that for people calling me, or i am calling hears them selves in an echo with about 1 sec lag.

I cannot hear this echo at all, but for everyone i talk to with the handsfree set hears this echo.

If i mute the mic, then the echo disappears.

My question is this: Is it possible to remove echo by using any software or android setting?

I think that there should be two ways of doing this:

1. muting my mic while the other part talks. (nearly like an automatic walkie talkie)

2. cancelling what is sent from the other part, and don't send the same sounds back to the other part again.
This is pretty hard to do with software, since there are delays in the audio stream. The transmission from you phone's BT to the headset can take up to 200ms, and the same for the reverse. Therefore before sending the audio from the mic to the recipient, up to 400ms of audio would have to be sampled and cancelled, assuming that the BT connection is stable.

Usually this is done in the BT headset itself, but, as you said, it's a cheap Chinese headset, so the circuits for this have been left out.

As far as I know, the only settings in Android regarding noise cancellation support only on-board noise cancellation mics.

As for the muting solution, some phones use compression to boost the mic strenth, which will raise the noise levels when the person is silent. This would cause the mute to be always on.