In Venice in the 18th century, a pamphlet war broke out, gloves off, no quarter. It was about the nature and purpose of theatre: on the blue side, Carlo Gozzi, fantasist tale-spinner, champion for the ancient commedia dell'arte troupes in the city; on the red side, Carlo Goldoni, heavyweight for the new realists, the kitchen-sink dramatists of the Age of Reason. Goldoni was a modern who derided the artifice - the mummery - of Harlequin and Pantaloon stagecraft; he declared it creaking, stale and boring. Gozzi, challenging him to a contest, vowed that, with yet another of these tired old vehicles, he could pull in far bigger crowds than Goldoni. He did so with The Love For Three Oranges - a fairy tale of a more than usually preposterous kind - which later inspired Prokofiev's opera. Goldoni retreated from Venice, though not, of course, from history or success.
Gozzi may not be a name on every theatre lover's lips, but his idea that true theatre's roots lie in popular bawdy and sentiment, as well as in techniques such as masking, slapstick, pratfalls and so on, is again making a strong showing. The work of many of the best "physical theatre" companies - Shared Experience, Complicite, Joint Stock, Cheek by Jowl and Kneehigh - flaunts the power of make-believe, by which fancy's images grow to great substance and constancy. Its self-declared pretences are gaining ground over verisimilitude and the drama of imitation of real life. For Angela Carter, theatre was the place where nothing was real - and yet where everything was more real, somehow, in direct consequence. Kneehigh, a long-established company of strolling players, has found the exact frequency to make Carter's fiction leap into life in the theatre.
Carter's writings have been called magical realist, but the term is a misnomer in her case, because she is a sceptic, a satirist and a supremely 18th-century spirit in her rational comedy. Yet magical realism also borrowed from Latin America marvellous fictions in which a Catholic cosmos of supernatural prodigies largely provides the fantasy. In Carter's case, the fantasy is supplied by magic far closer to hand - the illusion conjured by performance - with its native roots in street balladry, mumming, freak shows and circus acts. And her imagination returns to traditional arts of illusion and legerdemain: juggling and rope-dancing, the high wire and the flying trapeze, to the ambiguities of clowning and monster shows, of cross-gender play-acting and whiteface and panstick, costume and disguise.
All these elements are brilliantly captured in Kneehigh's production of Nights at the Circus, adapted by Tom Morris and Emma Rice (who also directs). Fevvers, the winged aerialist who dominates Carter's novel with her colossal appetite and titanic proportions and wings that unfurl and spread when she is aroused, like orgasmic vibrations writ on the body, becomes a far sweeter, less formidable creature in Natalia Tena's engaging performance. Even so, her winged silhouette high on the trapeze packs all the high-octane, heart-stopping glamour that Carter's prose, with its bejewelled mingling of high and low turns of phrase, captures on the page. Fevvers - the Cockney Venus whose name puns on metaphors of flight and of champagne - embodies Carter's style: at once gorgeous and coarse. Carter derived this style from many sources, but John Webster's The White Devil, with its images of diamonds and dung-heaps, echoes the most in Nights at the Circus. (At one point one of the circus clowns asks: "Do they laugh in heaven?", a variation on the question put by a child in Webster's play: "What do the dead do . . . do they eat?")
The commedia dell'arte and the Italian players who toured Europe passed down the words for the modes and skills a company such as Kneehigh draws on: they were pantomime artists, and this production of Nights at the Circus holds to that spirit, with Gozzi in the wings. It is, strictly speaking, a burlesque show, and one done with rough and vivid panache, right from the opening scene when the chorus comes on, in travesty, cross-cast and dressed only in underwear, whiteface and that stocking headgear worn under wigs. Lizzie, Fevvers's minder and foster mother in the book, is here played in drag by Carl Grose as a wonderfully stolid and grim personage, with his huge handbag and lumpy perruque; the madam of the brothel where Fevvers grows up is in double-drag as Ma Nelson, the ex-whore who only wears Y-fronts and the admiral's uniform complete with eyepatch. Amanda Lawrence doubles this part compellingly with the role of Mignon, a piteous wraith of a battered wife; her plight inspires one of the haunting songs by Stu Barker and Tom Morris. Morris has plucked phrases and scenes from Carter's novel with perfect judgement and sensitivity; this ballad, sung plangently by Buffo the Clown as he wallops her, is devastating.
Even more than burlesque, Carter was fascinated by masquerade. In Nights at the Circus, she writes of her hero, Jack Walser, after he's run away with the circus and become a clown: "When Walser first put on his make-up, he looked in the mirror and did not recognise himself. As he contemplated the stranger peering interrogatively back at him out of the glass, he felt the beginnings of a vertiginous sense of freedom . . . he experienced the freedom that lies behind the mask, within dissimulation, the freedom to juggle with being and, indeed, with the language which is vital to being, that lies at the heart of burlesque." Carter's fiction pours energy into this language of illusion, making up heroines who make themselves up, often with utopian passion: new Eves, winged wonders, spirits of liberty, who break the mould and recast their personae - their mask. (Carter wrote one of her best, most stylish, most trenchant journalistic pieces for New Society, about the return of lipstick.)
Three constellations above all gave her fiction bearings, and they are essentially theatrical: one is Edgar Allan Poe, or, more strictly speaking, Mrs Poe, his mother, the trouper who bore him and his brother and sister as she flogged her- self to death on the boards. Poe's Grand Guignol imagination imprinted Carter's earlier tales and novels more than those of her final period. But Mrs Elizabeth Poe is Fevvers's mother, too. In "The Cabinet of Edgar Allan Poe", a short story of 1982, Carter sketched the delirious seduction of the theatre: "Edgar would lie in prop-baskets on heaps of artificial finery and watch her while she painted her face. The candles made a profane altar of the mirror in which her vague face swam like a magic fish. If you caught hold of it, it would make all your dreams come true but Mama slithered through all the nets which desire set out to catch her."
A second star who never slithered out of sight in that magic mirror Carter herself peered into is Lulu, as played by Louise Brooks. Carter wrote a version for the National Theatre, which was published in The Curious Room, her collected dramatic works. It is the only stage play she wrote - all the others are for radio or film. The new play of Nights at the Circus transposes a scene from Lulu: Fevvers straddling one of her conquests who grovels on all fours, overcome with erotic ecstasy as she lashes him and suckles him with champagne. And hovering above them both is Carmen, swag-gering as she sings her "Habanera", softly picked up by the other girls: "L'amour est un oiseau rebelle . . ."
But Shakespeare sets Carter's scene above all - Shakespeare, who was also so caught up in the question of theatrical illusion ("The best in this kind are but shadows; and the worst are no worse, if imagina-tion amend them"). Wise Children, which is Angela Carter's last completed novel, revisits A Midsummer Night's Dream and The Comedy of Errors through a pair of old troupers, the vaudeville act of the Chance twins, but en route Carter pays homage to every single one of the plays. It, too, is now being adapted for the theatre - for the National - by Bryony Lavery.
The playtext of Nights at the Circus was made on the hoof through improvisation in rehearsal, so Morris's programme note informs us: the company read and reread the novel and then worked up scenes from the material, which they had to simplify considerably (it's a copious, picaresque novel with hundreds of characters). Circus acts - puppets, bungee ropes, a clown street band of trombone, tubas, washboard, accordion and toy banjo - capture exhilaratingly the zest and energy of the original's extravagant unreality, and the performers quote exactly some of the book's marvellous images and passages. But they have strengthened the clowns, and let fall one of Carter's masks, her irony about romance. So they have sweetened her work. For Michele Roberts, who came with me, and for me, too, this turn was surprising, appropriate and infinitely touching: it appeared that 14 years after her death Carter's defiance, her never-say-die, was bearing fruit, and the astringent yet festive feminism she had stuck to throughout the 1980s, against the "boys' club" (as she called it), in the face of disapproval from some Lizzie-like minders among the sisters, was blooming like Fevvers, and vamping and sashaying her feathered glory in plain sight again.
Nights at the Circus is running at the Lyric Hammersmith, London W6 (08700 500 511) until 18 February