Film-maker Terence Davies is renowned for the searing honesty of his films, and is living up to that reputation with his latest - a deeply personal documentary in which the story of Liverpool's rise to modernity intertwines with his own troubled upbringing. He talks to Michael Dwyer

TERENCE DAVIES discovered the pleasures of cinema as a boy growing up in 1950s Liverpool. "I watched movies all the time, and when I first saw Singin' in the Rain, I came out in a state of ecstasy," he says. "But if anyone said I would have made my own films, I would have told them that pigs might fly. Most films were made by middle-class people who had gone to university. Working-class people didn't make films, and that was my background."

Davies was still at film school when one of his earliest shorts, Madonna and Child, won a prize at the 1980 Cork Film Festival. We talked when he returned to Cork this month for the festival's timely retrospective of his work and the Irish premiere of his latest film, the fascinating documentary Of Time and the City. It was funded as part of Liverpool's celebrations as European City of Culture 2008, although it cannot be described as uncritical of its subject.

"I thought it would be interesting to do a documentary about the Liverpool where I grew up and to contrast it with the Liverpool that's there now," Davies says. "I was born in 1945 and left there in 1973, and the new city is alien to me." Did the city officials impose any pre-conditions? "I told them it was going to be a completely personal and subjective essay," Davies says, "and if they didn't want that, not to give me the money to make the film. And they agreed - the fools!"

The film ultimately becomes even more about Davies than about the city.

"The two things are intertwined," he says. "You can't get away from where you were brought up. In the 1950s, when I was growing up, my world was very small. It was my home, my street, the school, church, and the movies. It was tiny. You just didn't go a long way away. Within walking distance of my house there were eight cinemas, and another eight in town."

Few film-makers have confronted their own lives on screen with the candour Davies brought to his earlier autobiographical pictures, most memorably Distant Voices, Still Lives(1988), which is almost unbearably honest in depicting the harshness of his family's life with his violent, tyrannical father, played by Pete Postlethwaite.

"After my father died, we began to live," Davies says. "He was psychotic. I don't know how my mother survived from 1929, when she married him, to 1952, when he died. She was a woman of enormous strength.

"What was all that suffering for? It was just arbitrary, which was the hardest thing to accept. He inflicted terrible damage on us all. I had to leave out a lot of things because if I put them in, nobody would believe it. Some of my family told me I was washing dirty linen in public. My mother said I had told the truth, which was the biggest compliment."

At one point in Of Time and the City, Davies recalls a happy family event three years after his father's death.

"I have this vivid memory of 10 of us crammed into a room, listening to the 1955 Grand National on the radio. My mother had a little bet on Quare Times, which won the race. A wonderful Irish archivist, Jim Anderson, worked on the film. I asked Jim if he could find footage of the race, and he did."

Then there are his reminiscences of attending Friday-night wrestling bouts in Liverpool. His interest was, as he puts it, "something more illicit" - the erotic charge they gave him as a closeted gay teen. "My adolescent desires were so small and rather pathetic. When I was 15, I wanted to be big and muscular and manly like all my brothers. I was the runt in the family, the youngest of 10 children. Of course, I was riddled with guilt then because God could see everything. I would not go through my teens again if someone paid me. It was awful. I really touched a nadir."

Having turned from true believer to avowed atheist, Davies expresses strong views on the Catholic Church in his film.

"I really did believe from when I was five to when I was 22," he says. "That's a long time to believe, but the Catholic Church always says that any kind of doubting was the devil's work and you had to fight it, which I did for a very long time. I prayed until my knees bled. I felt that if I prayed long enough, I would be made normal. And that never happened."

Making Of Time and the Citymarked the end of a deeply frustrating period for Davies as he struggled to raise finance for fiction film projects, despite the international critical acclaim accorded his earlier movies.

"They were the only people who would fund me in eight years, so I'm deeply grateful for that," he says, "and not just for helping me make a film, but for making me feel worthwhile for the first time in eight years.

" You wonder if there's any point in carrying on. I seriously considered giving up film-making. It was getting just too hard. I'm very lucky in that I have a small circle of friends who are wonderfully supportive. I wish I could get solace from sex or drugs or rock'n'roll, but I don't do any of those things."

His previous movie was The House of Mirth(2000), a beautifully-made period drama based on an Edith Wharton story. "It didn't do as badly as some people think," Davies says. "It cost £4m (€5m) and it took £7 (€8.7m), which isn't bad, but it didn't get great distribution."

This gets him started on the film industry.

"There's nothing more dispiriting than arrogance coupled with ignorance. And there's nothing you can do about it. It's even more Kafkaesque in America. When we got the money for House of Mirth, I had these meetings where people would ask why the main character has to die. I would ask them if they had read the book.

"I tried to explain the tragedy in the story. I said that if Lear hadn't divided his kingdom between his three daughters, there would have been no tragedy. And somebody asked, 'Who's Lear?' I got bored to tears and did my best to control my temper."

After the great relief of finally making a comeback with Of Time and the City, there was more heartening news for Davies when it was selected for Cannes this year and received rave reviews. "I was amazed," he says. "Then it just seemed to take off. I don't know why. But I've been in a daze since May. It's not false modesty, but I really could not believe it got such a response. When there's a lot of praise, I get frightened. I expect something awful is going to happen."

This month he attended the Liverpool premiere of the film. Was this nerve-racking, given that the reaction on home ground must be the acid test? "I was absolutely petrified," he says, "and my family were coming and I wondered if people would hate it. Luckily, they didn't. The response was very positive. They were clapping away like mad."

If there is any justice, Davies won't have long to wait before his next picture goes into production. He is developing his screenplays for three feature films in different genres.

"There's a wonderful Scottish novel, Sunset Songby Lewis Grassic Gibbon, which I saw when it was dramatised by the BBC in 1961," he says. In a co-production with Dublin-based Samson Films, Davies is writing Lady Into Ice, a film noir based on the Ed McBain story He Who Hesitates, which he hopes to shoot in Chicago. The third project is in sharp contrast to everything he has made to date.

"I've just finished writing a romantic comedy," he says with a proud smile. "It's set in the present day in London and Paris - and with a happy ending."

• Of Time and the Cityopens today and is reviewed in this section

Davies and the not-so-Fab Four

TERENCE Davies was born a few years after his fellow Liverpudlians, the city's most famous export, The Beatles, but he was never a fan.

In his film, he blames them for ending the popular music era of the likes of Alma Cogan and Dickie Valentine.

"Then again, so did Elvis Presley," he says. "I remember seeing him in Jailhouse Rockin 1956 and I cringed through the whole thing. It was 90 minutes of sheer purgatory. You must remember that in 1956 Cole Porter was still writing. That was the end of that era of great songwriters writing poetry for ordinary people.

"Rock 'n' Roll didn't say anything to me, and neither did the Beatles. Money can't buy me love - God, isn't that original? I began listening to classical music, which opened up a whole new world to me."

The only 1960s pop song featured at any length in his film - and played over touching footage of servicemen leaving their loved ones for the Korean war - is He Ain't Heavy, He's My Brother, by The Hollies, who came from Manchester.

"If there's a great performance in a great song, it transcends being a mere pop song," Davies says. "And that is a great poem, fabulously sung. But I find most pop music unbearable, grotesque noise.