Are we allowed to cover that green light?" asks Steve Lazarides, squinting at a fire exit sign glowing in the gloom. "It would be fine if it was red, but..." But health-and-safety green neon doesn't quite fit with the mean-and-moody vision of hell the gallerist is trying to create. And, in any case, Lazarides, best known as Banksy's dealer and the godfather of graffiti artists, has never been one to play by the rules. Today, as the international arterati arrive in London for Frieze Art Fair and a week of private views in cool white cubes, Lazarides is putting on his own exhibition in a dank, dark, graffiti-scarred tunnel in south London, cramming it full to bursting with gruesome taxidermy, nightmarish mannequins, wriggling maggots and a giant mural of Bernie Madoff's face.
This is, clearly, what you get when you let a group of artists loose in the underworld. A year ago, Lazarides issued 15 of his protégés with a copy of Dante's Inferno and the promise of a darkened nook somewhere in the maze of railway tunnels running underneath Waterloo. The resulting installation, Hell's Half Acre, will run for one week only, a mildewed alternative to the air-conditioned marquees full of high-rollers in Regent's Park. "It's certainly going to be something different from Frieze," says Lazarides, looking thoughtfully at a menacing shop dummy wearing a gas mask. "The only reason I didn't do it last year was because I felt it was the wrong time to be poking fun at the art fairs. It was pretty grim. This year I thought, it's time to play again."
There are no besuited dealers beckoning you in with chilled champagne here. Instead, visitors must seek out a scruffy entrance around the back end of the station and make their way past a giant snarling, virtual pitbull standing guard at the door. Inside, fresh circles of hell come courtesy of Polly Morgan, who has contributed a chandelier made from stuffed pigeons, and Paul Insect, whose globe studded with 2800 syringes resembles a twisted glitterball. In a spooky alcove, Doug Foster has installed a mesmerising video of billowing flames while the wall opposite is taken up with black-and-white images of gangland New York by Boogie, a Serbian photographer based in Brooklyn. The 23-year-old Portuguese street artist Vhils is the man behind the Madoff mural, carving the $65bn fraudster's face out of a façade of flaking plaster.
"It's a vision of our hellish society under coalition rule," says Lazarides. "It's going to be tough for quite a long time, but in history things have never stayed bad forever. Sometimes you have to go through hell to ascend out the other side." He had originally planned a final coup de theatre where visitors would emerge into the Leake Street tunnels (where Banksy held his Cans Festival two years ago) to find the graffiti-covered walls painted all white "like heaven". The idea was only abandoned when he realised that there wasn't enough white paint on earth to keep one step ahead of the round-the-clock taggers.
On the morning I visit, Lazarides and his industrious team of installers, electricians, carpenters, even a couple of artists, are hard at work raising merry hell before the opening. Paul Insect is busy removing the caps from his thousands of syringes, Antony Micallef's merry band of bronze "weapon heads" (humans with guns for faces) are being buffed to perfection and Conor Harrington's armada of golden ships is being swiftly shunted out of the way of a leaking roof. There are maggots to marshal, the volume of the barking pitbull to be established and "the pest problem," says Lazarides, peering gingerly into a mouldy side chamber, "is still present."
When the Old Vic Tunnels first opened last year, Lazarides collaborated on Tunnel 228, providing dystopian artworks to go with Punchdrunk's dramatic take on Fritz Lang's Metropolis. He's been itching to get back underground ever since. "I know the arguments for putting work in white boxes with concrete floors, but it doesn't work for me," he says. "I have a pathological hatred of white. None of my galleries have white walls." While there is no performance element to Hell's Half Acre, it is unmistakably theatrical, with atmospheric lighting throwing up alarming shadows and a snarling soundtrack. Walking around it is not an entirely pleasant experience. "It's not supposed to be too comfortable – the whole idea is to put people slightly on edge." It is, though, art as entertainment. Open at night for one week only, it's aimed squarely at the post-work crowd. It's also free. "I feel that if you're putting something on, you're stealing a couple of hours of someone's time and they deserve to be entertained. I don't think you should have to pay for the privilege."
We wander into the bar, crammed to the roof with champagne for the private view. Though his shows provide entertainment for the people, these days Lazarides also has a "ridiculous" client list to think about, selling to celebrities and scions of industry as well as to traditional art collectors. "There's no denying that it's more mainstream than it was," he says, stepping over a crate of Veuve Clicquot. "That's progress. You'd be a fool to not want to do any better. I don't particularly feel that we've sold out in any way – we've managed to make it work."
However you look at it, he's come a long way since his introduction to the street-art world, photographing the back of Banksy's head for Sleazenation magazine. The graffiti artist had a stack of stencil prints under his arm and was on his way to the market in Bristol to sell them for £5 a piece. "I said, 'in that case I'll buy them all and sell them on'. I had friends who had a few quid who quite liked his stuff, so I wound up selling more than the person that was looking after him. And it just spiralled from there."
The first Lazarides gallery opened in Greek Street in London's Soho four years ago, followed by others in Rathbone Place and opposite Baltic in Newcastle-upon-Tyne. This summer he staged four exhibitions in LA and is currently opening a print shop there. Now he's staging an exhibition in Frieze week. Is he in danger of becoming part of the establishment? "This isn't hugely different in scope. We're still taking over a derelict space and putting art in it. We've been trying to grow up for a few years now. I'm not saying that street art is childish, but it's been nice to see these artists grow through it and develop. It's very easy to hang a tag on something and leave it there."
In fact, the term "street art" is becoming increasingly outmoded, thanks largely to Lazarides, who was instrumental in peeling it off the subway walls and tacking it up in a gallery. He'd argue that it's been going on for much longer than that, pointing to Norman Mailer's 1974 essay in The Faith of Graffiti. "That Basquiat bloke did alright, Keith Haring didn't do too badly," he adds. "People forget the tradition that they came from because they've been assimilated into the 'real art world'." In the last few years there have been exhibitions at Tate Modern, the V&A and Fondation Cartier in Paris dedicated to the form. Meanwhile, the newly appointed head of Moca in Los Angeles, Jeffrey Deitch, is to kick off his first season at the museum with a major survey of street art in 2011, involving over 100 artists.
Lately, Lazarides has been looking further afield for talent – to the Middle East, Russia and South America. "The economic situation might throw up some new stuff, but at the moment I'm finding it a little flat here," he says. "I'm never in a rush. I have no problems waiting three years to find a new artist." He has plans to stage an event at next year's Art Basel Miami Beach and shake up the art scenes from Beijing to Tel Aviv. For now though, it's back to tweaking the underworld. "I'm not sure how long to keep the pitbull barking for," he says, disappearing down the stone staircase. "I don't want to drive everyone completely insane."
Hell's Half Acre, Old Vic Tunnels, London SE1 ( www.hellshalfacre.co.uk) to 17 October