Director Guillermo del Toro's distinctive blend of horror and fantasy is born out of the violence he was surrounded by growing up in Mexico. "I saw people decapitated," he tells Donald Clarke

BEFORE embarking on their careers, critics should, perhaps, deposit the word "masterpiece" in a securely locked box and then place that container on a lofty shelf beyond the reach of even their highest stepladder. This weightiest of compliments, more appropriate for Malick than Minghella, should, ideally, be retrieved slightly less often than the Christmas decorations on the ledge below.

It is, thus, with some caution - though no little confidence - that I tell Guillermo del Toro, a relentlessly agreeable Mexican with wild hair and an ample torso, that his new film, Pan's Labyrinth, is easily worthy of the m-word. This singular diversion, set in the aftermath of the Spanish Civil War, follows the adventures of a sad young girl as she is taken to live with her vile new stepfather, a Civil Guard captain, in a remote area still harbouring guerrillas loyal to the defeated Republic.

Whipping up memories of Narnia, Alice in Wonderland and the animations of Hayao Miyazaki, while still remaining entirely its own beast, Pan's Labyrinth finds young Ofelia escaping from the horror around her into a fantasy kingdom containing a creaking, untrustworthy faun, a giant frog capable of odious metamorphoses and a bald demon whose eyes rest in the palms of his hands. At this point, many readers, scenting twee fantasy, could be forgiven for turning their noses up suspiciously. But Pan's Labyrinth - no kids' film - is so in touch with death and pain that it easily evades comparison with the likes of Willow or Legend. The imagined worlds, uneasy and shifting, look, on reflection, more like the work of Luis Buñuel than CS Lewis.

Guillermo del Toro was born in Guadalajara in 1964 and raised largely by his grandmother during troubled times for Mexico. Commentators seeking the origins of the dark vision that brought us the vampire tragedy Cronos, the first-rate mainstream thrillers Blade II and Hellboy and his earlier Spanish Civil War spookfest The Devil's Backbone have often looked to the violence he encountered as a youth.

In a recent interview he said: "I've had guns put to my head. I've seen people burnt alive, stabbed, decapitated . . . because Mexico is a very violent place." One can't help but wonder if Ofelia's escape into fantasy mirrors some mental transportation the director himself underwent as a boy. Did his own imagination offer sanctuary from all that horror?

"Yes, I saw people decapitated. It is a violent place," he says. "But it is not just about escape. Like the girl in the film I think I used fantasy to articulate the world around me. That is why, I think, the fantasy world in the film is every bit as violent and complex as the world around her. I love the way in Terry Gilliam's Brazil the hero's fantasy world gets poisoned by reality. It is impossible to live in the world and not have a tainted imagination."

Del Toro, who has been a fanatical cineaste and horror aficionado since his childhood, concedes that he still finds solace in imagined worlds.

"I would say cinema saved my life. Literally," he enthuses. "In 1997 my father was kidnapped and I think, maybe, the epiphany of film fantasy saved my life. When you are suffering that sort of despair and anger it affects you in a physical way. You are burning with rage. You have palpitations. You have heart pains. I was writing a script of The Count of Monte Cristo and the rage in there lifted a weight off my own shoulders. Then sometimes, when you are in despair, just seeing a movie can transport you somewhere else and save you."

It is worth saying here that, on the surface, del Toro could not seem any less tormented. A jolly, articulate man, who speaks terrifyingly fluent English, he comes across like a magnified teenage comic fan with more facial hair and a better vocabulary. Yet he admits to a classically conflicted Catholic childhood. His grandmother, left in charge of the boy while his parents gallivanted, was so appalled by his affection for all things horrible that she twice arranged for his exorcism.

At an early age, he began filling notebooks with beautiful, fantastic drawings that have continued to serve as the inspiration for his extraordinary films. The last time his granny saw him she looked at the sketches and asked: "Why can you never draw anything beautiful?" His brilliant eye for the macabre quickly got him work in the movies, initially in the field of special effects and make-up. After knocking together a few shorts he embarked on the oddly beautiful entity that is Cronos. Released in 1993, this curious film, which brought surprising sympathy to the story of an aging vampire, made an impressive amount of money and won del Toro many awards. It remains, nonetheless, the only film he has made in his home country.

"Well, that is partially a banal matter coming out of the kidnapping of my father," he explains. "I am still living in the sequel of that. My situation is difficult in that some of the men were not caught. So there is a security issue there. But there is also a problem in that, in Mexico, fantasy and the supernatural are just not regarded as serious subjects to funders. Cronos won prizes everywhere, but nobody in Mexico would give me any more money."

So he was lured to Hollywood by the Weinstein brothers where, following a severely fractious shoot, he delivered the interesting, if flawed, shocker Mimic. Del Toro has claimed that the experience of making Mimic, which imagines giant insects taking over Manhattan, was even more traumatic than the kidnapping of his dad. Can this really be so?

"I think so. That was because it was like an experience of absolutely unrequited love. I went in trying to do a moving Catholic picture in which God is so angry with us he gives the insects a chance to rule. They wanted to make Alien 4. It was incredibly painful and frustrating."

He has, however, learnt from that experience and come to an accommodation with Hollywood. We are long familiar with the notion of the director who intersperses individual projects with more commercial ventures, but del Toro is quite fanatical in his adherence to that timetable. After Mimic, New Line Films offered to pay the producers of The Devil's Backbone a bonus if del Toro would agree to make a sequel to the studio's vampire adventure Blade before embarking on the more eccentric Spanish Civil War project.

"I just said: 'No. I don't want to do it now. If you are prepared to wait then fine,' " he says firmly. "What I learned from Mimic was the ability and power to say: 'I'd rather not.' The most efficient and beautiful resistance is just to say 'no'. I learned what the girl learns in Pan's Labyrinth; I learned to be disobedient. Hollywood is not an inherently evil system. It makes some great films. But you have to be sure you and the studio are making the same film."

Del Toro has used that quiet, polite determination to fashion one of the most delicious careers in world cinema. Hellboy is a prime contender for the title of best ever comic-book adaptation. The excellent Blade II stands as a reproach to the films either side of it in the franchise. Then there are distinctive quasi-art films such as The Devil's Backbone and, now, Pan's Labyrinth.

If the film had not turned out to be the masterpiece it undoubtedly is, del Toro - producer, director, writer - would have had nobody to blame but himself. He claims that this is the first film on which he compromised to nobody in achieving his vision.

"In some ways my vision did prove too ambitious for the modest budget of €15 million or so. So, as director, I said to myself, as producer: 'Take my salary.' And, as producer, I graciously accepted.

"There was one scene where the stuttering man is being tortured and another producer said: 'We should cut this. We need to save the money.' And I just said: 'Get the fuck off the set.' Now on a studio picture there would be no such argument. That scene would have been cut."

So, what have we ended up with? Upstairs, the magnificently savage fascist villain, played, with no constraints to humanity, by Sergi López, murders innocent peasants and bullies Ofelia's frail, pregnant mother. Below, in damp caves, a camp, horned beast with the unsettling charisma of (the director's words) the young Mick Jagger issues dubious commands to the uncertain young girl. Pan's Labyrinth feels so secure in its own mythologies that it hardly seems appropriate to inquire who the fantastic beasts are and what they are up to.

"I believe that things in movies and fairy tales are because they are," he agrees. "That is the only logic. Why does the frog in Pan's Labyrinth consume himself when you give him three jewels? Because that's what he does. I hate the way Americans have fucked up story by tracking back and making sure there are always pay-offs. That perversity has fucked up audiences, I think. Why do the chandeliers become arms in Cocteau's Beauty and the Beast? Fuck you! Because they do." He is - if such a thing is possible - becoming cheerfully furious now. He waves his finger as he warms to his evangelicalism.

"There comes a point where my patience runs out. I know why the characters are there. I can tell you some answers. But if you know all the answers why bother making or seeing the film? Fairy-tale logic is what attracted me first and fairy tales have a way of just being."

One senses from his tone that del Toro would resist commentators drawing too many explicit political messages from his film, but, like so many other contemporary directors, he will have to deal with punters seeking allegories for the war in Iraq. Civil war, mistreatment of prisoners, the perils of insurgence: the key themes are all here.

"Oh, I would not deny that," he says. "In some way all my recent films are post-911 movies. You can't deny it. I believe that this film is created in a way to address that anxiety but is not corralled by it. I'm sure if you see the film in five years or 10 years from now it will still make sense. It is, I hope, like all those films that reflected the Cold War and Vietnam. You cannot think of art without thinking of the times in which it was made."

Though the film does, indeed, reflect certain current worries, it moves, for the most part, through the timeless, context-free universe of the fairy story. Viewers have the freedom to project their own concerns on the picture. With that in mind, one can't help but speculate upon the various responses del Toro must have encountered.

What surprised him most about audience's reactions? "Two things keep surprising me," he laughs. "One is when people tell me that the fascist villain is too much of a bad guy. I am surprised at that. I suppose in this age - after Renoir's Rules of the Game - we are expected to see the softer side of everyone. But he reflects a particular type of Spanish fascism that is totally unforgiving.

"The second thing that surprised me is when people have strong opinions as to whether the world of the faun - the fantastic world - is real or imagined by the little girl. Most say it doesn't matter, but some people have really strong opinions one way or the other." It doesn't matter. It works both ways.

"Yes. The movie is what it is. It remains untouched by your interpretation. I happen to love the Jungian notion that these archetypal creatures are different things to different people. Each person owns them." Then his big face twinkles with a smile.

"And then again, maybe Freud was right. Perhaps a cigar is just a cigar."