Just a mile from Copenhagen's royal palace, a war is being waged. Two armies face off against each other: suited, bourgeois conservative politicians and property developers, against the alternative, anarchist residents of Christiania, the autonomous "free city" in the heart of the Danish capital.

For 36 years, Christianites have made their own rules and lived life their own way. Today home to more than 700 people, ranging from ageing hippies to young families, Christiania enjoys a worldwide reputation for peaceful, self-sufficient, environmentally-friendly living.

Denmark's famous social experiment has seen off countless threats to its survival over the years, from drug wars to biker feuds, and even embraced tourists anxious to see one of Europe's last bastions of alternative living.

But now the settlement faces its greatest threat yet, from a right-wing government anxious to reclaim and redevelop the valuable city-centre site. The battle for Christiania is not another tale of gentrification, though; it is about "normalisation".

"Twenty-five years ago nobody cared about this area, nobody knew what should happen and we were left in peace," says Nils Vest, a long-time resident and filmmaker.

"Now suddenly you have building contractors who know they could make a fortune if they could tear down Christiania and build boring apartment blocks."

The original residents took over the site, a dilapidated military base, in 1971. Frustrated by a lack of affordable housing in the city, they ignored planning and property laws and built their own community from nothing. In their founding statement, they called Christiania "a self-governing society whereby each and every individual holds themselves responsible over the well-being of the entire community".

They created a co-operative community without ownership laws or top-down government and encouraged everyone to join them by "emigrating on the number eight bus".

Today Christiania is a diverse settlement of 14 districts. Streets are lined with restored barracks and warehouses, wooden family houses, cottages and huts. The rights to each home are owned by the community.

The streets are filled with galleries, artists' studios, clubs, a cinema and a famous bicycle factory. Each adult resident contributes €190 to the community coffer a month, as well as a charge for heat, electricity and water. Above a noticeboard advertising everything from yoga lessons to theatre performances, a fluttering banner reads: "Live life artistically! Only dead fish follow the current."

For many Danes, though, Christiania is synonymous with "Pusher Street", a ramshackle thoroughfare of stalls selling Che Guevara T-shirts as well as cannabis and other drugs.

Tolerance of soft drugs was central to Christiania's popularity with visitors until a drug-related gang shooting on Pusher Street in 2005 prompted the government to send in regular police patrols. The shooting also redoubled the government's determination to reclaim the site. What was once a neglected eyesore is now a 40-hectare waterside site in a city with a housing shortage.

Last year, the government presented a proposal to open up Christiania, making it a normal residential neighbourhood with new apartments and a new park. Christianites reacted in horror to the proposal, but many soon realised they held a poor hand.

Technically, Christiania doesn't exist and its residents have no legal residency rights, making it easy for the authorities to increase pressure for a deal.

A spokesman for the ruling conservatives says that, after 36 years, "society has changed a lot in that time but Christiania has not . . . Christiania itself has forced us to make these changes".

After long negotiations, Vest says they have won enough concessions to make the plan palatable to residents ahead of a final meeting on August 13th.

As part of a compromise deal, Christiania would become a non-profit foundation. Current residents could remain, but only if they buy their homes or pay rents near market prices.

As a deadline for agreement looms, all eyes are focused on a land war that is also an ideological struggle. For many, the fate of Christiania symbolises the decline of liberal tolerance and the rise of bourgeois conservative values following the 2001 election.

"The government has tried to divide us but they haven't succeeded," says Vest. "Still, one way or the other, there had to be some kind of legislation for Christiania in the end."