On the stage of Brighton's Theatre Royal, Nicholas Parsons, Su Pollard and a vast throng of luvvies are gathered around a gigantic birthday cake. But this isn't Pollard's birthday party, or Parsons's for that matter. It's the 200th birthday of one of Britain's oldest theatres, a theatre that has played a leading role in the story of Britain's greatest seaside resort.

The Theatre Royal Brighton opened in 1807 on the eve of the riotous regency of George IV, the "Prince of Pleasure" whose sleazy patronage put Brighton on the map. The theatre, however, didn't squander its assets, unlike the decadent Prince Regent. Its most famous manager, Ellen Nye Chart (1839-92), handed out free tickets to inmates of the local workhouse, and during the 20th century it went from strength to strength. Noë Coward's Design for Living opened here rather than in London, because its producers thought that local punters would be less shocked by the play's risqué subject matter - and they were right. A Man for All Seasons also opened here, starring Paul Scofield. Lauren Bacall, Bette Davis and Marlene Dietrich all trod the Theatre Royal's creaky boards.

But Brighton's theatricality has never been confined to its theatres. Its inhabitants have always been exhibitionists of one sort or another, and its streets have always been a stage for extroverts of every stripe. It was Dr Richard Russell who turned Brighton into a resort in the 1750s with his quaint notion that sea water was good for you. His well-meaning quackery brought "dippers" such as Martha Gunn to town, intent on separating wealthy ladies from their surplus cash. While Martha dipped the women in the sea, her colleagues sold telescopes to the gentlemen on the shore, giving Brighton its first female revue. Taking the waters was a good excuse for a party, and Brighton became a place for posing and promenading, starting a tradition of street theatre that is still evolving, from the mods and rockers of the Sixties to Gay Pride parades today.

The grandest stage set in town (even grander than the Theatre Royal) is the Royal Pavilion, a building that epitomises Brighton's passion for display. Nowadays this lavish landmark is venerated as a national monument, but it is actually as tasteless as a stick of seaside rock - and all the better for it. George IV had never been to India, and nor had his architect, John Nash, so his pseudo-Oriental folly was about as authentic as Disneyland. No matter. Extravagant and kitsch, the Pavilion is a perfect symbol for Brighton. No wonder Queen Victoria hated it, and stripped it of its furniture. She hated the town, too, and it is easy to see why. Brighton is frivolous and exotic - everything she wasn't - and after all these years it still hasn't lost its old Regency swagger. Its inhabitants are still dandies at heart.

For years, Brighton was a furtive hideaway for dirty weekenders, but now even its guest houses are coming over all theatrical. There was a time when you had to choose between a stuffy hotel and spartan bed and breakfast, but not any more. Maarten Hoffmann first came to Brighton as an actor in a production of Hair. Today he has transformed a traditional bed and breakfast into the Townhouse, a flamboyant boutique hotel. With eight themed rooms, ranging from La Chambre de Louis to the Beijing Dragon, it is like the Royal Pavilion in miniature.

Brighton has always been a refuge for all kinds of minorities and refuseniks. In the 1890s, when Oscar Wilde visited with "Bosie" Douglas, homosexual men had already been coming here on holiday for 60 years. Homosexuality has been a liberalising influence and an economic catalyst. Today, Brighton is fast becoming Britain's first metrosexual city, a place where you actually expect a pub called the Queen's Head to display a rainbow flag rather than a portrait of Her Majesty. Here, camp isn't simply a euphemism for anal sex - it is a byword for individuality of every sort.

In such a theatrical resort, it is no surprise that so many locals have been entertainers. Steve Coogan and Fat Boy Slim are modern-day residents, but Brighton has always attracted A-list stars. Ivor Novello, Terence Rattigan and Flora Robson all lived here. Max Miller was born here, and lived here throughout his life. When he played the London Palladium, he had it written into his contract that he had to be off-stage every night in time to catch the last train home. Laurence Olivier made his adult stage debut here, at the old Brighton Hippodrome. He tripped up, fell flat on his face, got a big laugh and never looked back. As Baron Olivier of Brighton, he lived here in a house on the seafront. John Osborne was inspired to write his greatest play, The Entertainer, while washing dishes in Brighton's Metropole Hotel. Olivier played the title role. They shot the film version on the West Pier, now a sad shipwreck of scrap metal.

Osborne would have relished the symbolism of the derelict West Pier, but in fact the pier is just about the only thing in the city that is redundant and decaying. Osborne's play was a portrait of Brighton (and Britain) in decline, but this rusting hulk is actually a symbol of Brighton's renaissance, rather than its demise. Of all the seaside towns that rose with the invention of the locomotive and fell with the invention of the jet aeroplane, it is the only one that has found an identity beyond candyfloss and fish and chips. Smart, sassy and media-savvy, Brighton is a city beside the seaside, rather than just another seaside town. The Theatre Royal survived the death of music hall and weekly rep. Now its biggest challenge is to keep up with the place that spawned it, as Brighton becomes London's most fashionable suburb, and leaves its kiss-me-quick competitors far behind.