They don't shop in the same shops, swim in the same pools or even wait at the same bus stops. Peace

One day recently in south Belfast a Catholic priest told a room full of Protestants that they were "like the Nazis". At about the same time in north Belfast a group of loyalists picketing a service at a cemetery threatened Catholic mourners that they would "dig up your graves". Sectarianism, the force that fuelled more than three decades of bloodshed in Northern Ireland, hasn't vanished with the coming of peace.

The world greeted the end of the Troubles with relief, thinking that at last the people of this difficult place could learn to live together, and so slowly move towards normality. Of course there would be difficulties, of course there would be an emotional hangover from all the violence, but some day in the not-too-distant future, Catholics and Protestants would trust each other. That is not happening. The shooting and bombing may be more or less over, but Northern Ireland is not set on a path - even a long and winding path - towards a modern, consensual normality. Instead, the bigoted world-views that cause people to call each other Nazis and to threaten to dig up corpses probably have an even tighter grip than they did when the Troubles began 40 years ago. And the British state has colluded in this.

Though the word "sectarianism" did not appear in the Good Friday Agreement, it is enshrined in the so-called peace process, with the result that Northern Ireland is adopting a form of apartheid, and the minds and lives of its people are being partitioned with official blessing.

To outsiders this is most obvious in the politics, where dialogue scarcely exists. Support for moderate parties has evaporated and David Trimble and John Hume, never a happy match but at least able to sit in a room together, have given way to Ian Paisley and Gerry Adams. That leaves power-sharing - long a prime objective of British policy - such a remote notion that the province's elected assembly has not even been invited to sit for three years.

But the apartheid is also vivid on the ground, and it is there that its effects are most poisonous and most lasting. In the Ardoyne district of Belfast, for example, four out of every five Protestant residents will not use the nearest shops because they are located in Catholic streets, and the same proportion of Catholics will not swim in their nearest swimming pool because it is in a Protestant street. Most 18-year-olds in Ardoyne, of both religions, have never in their lives had a meaningful conversation (about, say, family or sport) with anybody of their own age from the other side of the "peace line" that runs along Alliance Avenue.

And those peace lines - usually high walls snaking along the demographic faults, crossing roads and slicing streets in two - are proliferating: there are twice as many today as there were a decade ago. With them go other things: separate bus stops, for instance. Buses passing through the gate in the wall between White City (Catholic) and Whitewell (Protestant) in north Belfast must stop on either side so that no one has to wait among people of a different religion. Meanwhile, among Northern Ireland's next generation, nine out of ten children attend segregated schools. Integration of education isn't even on the agenda.

This new apartheid is not being challenged in the changed, relatively peaceful atmosphere; it is being turned into an institution, from the top down. This is because the people who framed the post-Troubles Northern Ireland believed it was a way forward: that by acknowledging and accommodating sectarianism they would tame its scarier edges, and that "moderate" variations of unionism and nationalism would emerge the winners. The opposite has happened.

In the realm of politics the story of the drift to the extremes is well known. As with the "war", so the "peace", when it came, looked very different to each side. To one it seemed to guarantee the Union, at least for the time being, and to mark the IRA's defeat; to the other it began the creation of institutional equality and offered a template for a united Ireland that would give unionists equivalent freedoms.

As time passed, unionists blamed the IRA for not decommissioning and nationalists blamed unionists for fearing change. Devolved government was tried and collapsed four times, sitting for 30 months in total. The language of Trimble's Ulster Unionist Party (UUP) and Hume's Social Democratic and Labour Party (SDLP) became more immoderate, but they were out-outraged by Paisley's Democratic Unionist Party (DUP) and Adams' Sinn Fein. And that proved to be what the voters wanted to hear.

Now Paisley, 80 next April, leads the fourth-largest party in the Commons; his wife, Eileen, is about to become a DUP peer; and he himself is newly elevated to the distinction of Right Honourable - which is not bad for someone sneerily dismissed as "yesterday's man" by Tony Blair in 1998.

Sinn Fein is also getting bungs. The (almost) clean bill of health it received from ceasefire monitors last month means the party is once again able to claim the £130,000 in parliamentary expenses denied to it after what Blair coyly called "the events of earlier this year" - the £26.5m Northern Bank heist and the murder of Robert McCartney.

Having taken command in politics, these parties are able to extend their influence into Northern Ireland's many quangos, so that people "approved" by Sinn Fein or the DUP are, by right, landing big jobs once reserved for the "sensible middle". The new post of victims commissioner, for example, has gone to a candidate promoted by the DUP, while the human rights commissioner is someone with nationalist backing.

The state's role is to be what the local disability activist Michael Morgan calls "the sectarian balancer" across the range of public action: just as the DUP "gets" one commissioner and nationalists "get" the other, so Sinn Fein "gets" official support for the Irish language and loyalists "get" similar backing for the long-neglected Ulster Scots dialect. And so on. Increasingly, the fate of 1.7 million UK citizens is in the hands of two parties that hardly bother to compete with or relate to one another, but seek above all to ensure dominance of their own communities. And the state merely acts as their facilitator.

At the grass roots, the gulf between the two main communities has been widening. There are no shared interpretations of current affairs, no common vision for the future and no collective view of the past. Nor is there much room for discussion within each bloc.

For many years journalists visiting west Belfast in search of the "voice of the street" were bemused to find that nine out of ten voices said exactly the same thing as the Sinn Fein leadership. The party's ideological dominance isn't weakening with peace; it is growing stronger. Posters and murals reinforce the message, as do the local newspapers, ridiculing all other nationalist opinion, in particular the SDLP. Daily Ireland, for example, has described the late Gerry Fitt, the MP and SDLP founder, as an Uncle Tom.

Unionist newspapers are no more generous. Indeed, the language of the local press, which once was a moderating force, is hardening just like everything else. The Shankill Mirror recently launched a "Love Ulster" campaign, warning its readers that the danger of a united Ireland had never been closer.

Research for a forthcoming book by the academics Peter Shirlow and Brendan Murtagh shows the strength of the fear of "others" in the two communities. Territorial markings such as painted kerbstones and graffiti screaming "Kill All Taigs" (Catholics) or "Kill All Huns" (Protestants) act as frontiers, at once intimidating outsiders and keeping insiders in line. Surveys of 9,000 people in "interface areas" found three-quarters refusing to use the closest facilities because of location. Eighty-two per cent routinely take longer journeys to gain access to benefits in "safer" areas; 60 per cent refuse to shop in "other" areas, many fearing that they will be ostracised by their own community if they spend money among the other lot. Ominously, fear of the "others" is most intense in the 16-24 age group.

These deep feelings can surge suddenly to the surface. In 2001 a rumour that a Protestant pensioner suffered sectarian abuse at a post office was enough to prompt the siege of the Holy Cross primary school, where stones, urine-filled bottles and even a pipe bomb were thrown at terrified five-year-olds. During riots two years ago around Short Strand, the Catholic enclave in east Belfast, loyalist paramilitaries warned local doctors and pharmacists not to treat or serve Catholics.

Outside the ghettos, you might think, things must be different - and they are, but not in ways you would expect. While most western democratic parties devote a great deal of effort to formulating policies that please the middle classes, who are more likely to vote than the working classes, politics in Northern Ireland is distinctly proletarian. The workers, anxious and engaged, vote in huge numbers, while the middle classes stay at home.

In particular the Protestant middle class has opted out. North Down and Lagan Valley, suburban heartlands of the class, are among the constituencies with the lowest turnouts in the United Kingdom, because most of these people don't vote. They have no reason to. Educated Protestants who have Catholic friends and feel secure in their British identity tend not to have much time for sectarian victimology. They have deserted the organisations, such as the Orange Order, that they dominated before the Troubles. The UUP still attracts some businessmen, but it is a dying party, while the booming DUP, which is largely teetotal and born-again Christian, does not appeal. It so happens, too, that the middle classes on both sides do quite well out of direct rule, which gives them little economic interest in local politics.

This raises another question. For years everyone investing in Northern Ireland, be it the UK government, the EU, US agencies or any one of myriad commercial and phil-anthropic organisations, has aimed to combine reconciliation with reconstruction. Untold millions, in other words, have been ploughed into building cross-community trust. What good has all that money done?

Tom Kelly, a Belfast businessman, has an answer. "Compared to the North, the republic got roughly one-third of EU funds made available, but they built a real economy, creating jobs and opportunity. We preferred the less travelled road of building an inter-community infrastructure around what is not there. Despite spending hundreds of millions of taxpayers' money on community relations, we have ended up more polarised than ever before."

One political party sees things Kelly's way: the Alliance Party, which, with no MPs and just six Assembly members, has been all but beached by the sectarian tide. Alliance estimates the cost of underpinning Northern Ireland's segregated society at £1bn each year. This includes security costs - having three times as many police per capita as London, building "peace" walls and cleaning up after riots - as well as the price of the vast duplication of services required to spare the two communities from having to share schools, health facilities, swimming pools and bus stops. Then there is the price of lost inward investment and tourism.

If £1bn sounds on the high side, consider this: in April, the Belfast News Letter reported on a parade by a loyalist marching band that raised money for victims of the south Asian tsunami. Marches are sensitive: one side often sees them as a right and the other as a provocation. Security is usually required. According to the paper, the cost of policing this one was £29,444. It raised £500 for charity.

While the conflict that some called the Long War raged, well-meaning people dreamed of peace, normality, justice and reconciliation. Now that it is over, what they have got instead is a very expensive, heavily policed and officially blessed apartheid.

This article first appeared in the 28 November 2005 issue of the New Statesman, Apartheid