The artist who polarised East London with her 'House' sculpture has found a new home on the rooftops of Manhattan. Jonathan Jones talked to Rachel Whiteread.

Rachel Whiteread is coming home. But this is a spiritual rather than literal homecoming for Britain's greatest living artist. Her latest project is in New York City. "Being an English person I think it's a place I feel very familiar with," she says. "It's somewhere I felt at home." These are arresting remarks from an artist who has done so much to unsettle our notion of home, to shake our faith in the familiar. Whiteread is comfortable with New York, in the same way as modernists such as Marcel Duchamp and Piet Mondrian. She's found a real version of the modernity her art imagines.

Whiteread is a quiet provocateur, an accidental terrorist. She used the word "reticence" about herself when we spoke, and her casts of the spaces under baths and beds or inside a cupboard turn inward on themselves. Yet none of her contemporaries has caused as much upset. Her art has been a sustained assault on British identity, at its most explicit in her 1993 House, in which she filled a cosy terraced house with concrete. The emergence of the cast from its chrysalis was like peeling away Britishness to expose something cold, hard and abstract. "You can never hope for any one kind of response," she says now, "and I learnt that with House. People loved it, people hated it." The same intense divisions have stalled her holocaust monument for Vienna in the form of a sealed, inverted library stacked with books that will never be opened. No wonder she's drawn to New York, where modernity is the stuff of everyday life.

Rachel Whiteread is casting the interior of a water tower on the roof of a seven-storey building in SoHo, the gallery district of Manhattan. The tank, "a barrel with a conical top", 13ft high and 9ft in diameter, is being cast in clear plastic resin. "We're trying to make it look as if it's been filled up but for various reasons it's hollow," she told me. "It will have a quality of stagnant water. We've gone for the clearest material we can get; it may virtually disappear if it's a very white day or a very blue day."

New York's Public Art Trust invited Whiteread to work in Manhattan soon after the sensation of House. They offered her prestigious spaces, for example an entrance to Central Park. "I have a very complex relationship to public sculpture," she says. "I'm not someone who enjoys tripping over something in the street." She started to scour the city for a more meaningful site. "It was about wanting to do something that was integral to New York. I was wandering around and started to look up. I always thought I'd be struck by the skyscrapers but I was just as struck by the brownstone buildings. They were there before anything else." Whiteread was less drawn to the vertical empire of midtown Manhattan than to the downtown architecture of flat-roofed 19th-century factories and apartment buildings with iron fire escapes - the landscape of immigrant and industrial New York. And then she noticed the water towers on top of the brownstones. These cylindrical storage tanks play a part in the city's architectural spectacle, their round forms juxtaposed beautifully with soaring verticals, yet they bring Manhattan's gigantism down to a "more domestic scale".

Whiteread's water tower is a romance with Manhattan, a fairy tale of New York. To make the cast she's working with the Chelsea-based American Tank Company, one of only two manufacturers of water towers. "There are all sorts of funny stories I've heard," she says. "There isn't a history of water towers, except the verbal history of the two companies. They love water towers. It's their life." There are strange stories about the relationships people have formed with these grand yet comforting structures - "people are very attached to them". Someone told her a good one about the conceptual artist Gordon Matta-Clark. "He lived in SoHo and they used to use the water tower on their roof as a swimming-pool." On a sweltering summer day, Matta-Clark and his friends would climb the tower and cool off with cans of beer, floating in the secret world of the cylindrical tank.

This is a seductive image of the early days of SoHo as an artistic community. Today SoHo is the commercial centre of the Manhattan art world. Nineteenth- century cast-iron buildings have been converted into lofts, studios and galleries; even the galleries think SoHo is too commercialised, and the cutting edge is moving to Chelsea. But in the Sixties and Seventies, when Gordon Matta-Clark floated in his water tower, SoHo was a low-rent haven for artists, a place where art and everyday life seemed to merge magically. Whiteread feels a deep affinity for the minimal and conceptual art that came from that convergence. "The history of minimalism," she says, "has far more to do with America than with Great Britain. New York feels a very comfortable place to work; that's to do with a tolerance of artists. I'm very connected to British culture, but it's to do with the everydayness of art over there."

Whiteread's water tower will stand above SoHo like a lighthouse. "You can see it from various vantage points. It's quite a prominent building on a corner." The transparent resin she's using will make it look as if the outside of the water tower has been removed to reveal the water within; a tower of water. Her design shows it framed against the New York skyline, veiling the top of the Empire State Building, a juxtaposition that makes the tower look like an anti-skyscraper. Skyscrapers defy gravity. Whiteread's column of water draws attention to gravity by its very absurdity; water falls; it doesn't just hang there. The semi-visibility of the tower also parodies, by its incompleteness, Manhattan's conquest of vertical space. Whiteread's cylinder is there and not there, a ghost of Manhattan's deep industrial past and its more recent Bohemian history. Above all, it's an eyrie for the imagination. The spectator will be allowed a glimpse of the utopia Whiteread evokes in her story of the secret swimming-pool.

It's significant that Whiteread started experimenting with transparent resin soon after the endgame of House. Her early casts under baths, beds and sinks were radically opaque. She used dental plaster and rubber to create closed, sealed forms. "I'd make pieces that were very dense, and you never knew about the inside of the objects," Whiteread told me. She turned to resin to attempt a different effect, the inverse effect, an opening up of the object's hidden interior. "I wanted to bring the inside out." In 1994 she cast Table and Chair (Clear) in a glutinous resin that admitted light. "As you saw it refracting different light conditions, it changed." Her green resin cast of the space under a wooden floor, Untitled (Floor) (1994-5) glows, when the light catches it in a certain way, with a life of its own. "I was trying to animate something from the inside," she says.

When I saw Untitled (Floor) in her 1996 retrospective at the Liverpool Tate Gallery it seemed about to float up from the gallery's floor and out of the window, it was so light, so alive. At the same time it was marked with traces of floorboards; the grain and knots of planks, the joints between them, the scars of damage. Below these imprints of everyday life was a secret space that had been there all the time when people walked over the floorboards, and this was the hidden place Whiteread photographed by turning the floor upside down and pouring resin between its supporting beams, in the same way that she's photographing the hidden world of the water tower.

She doesn't yet know how the tower, the biggest object she has ever cast in resin, will behave in changing light conditions. "It's very difficult to figure out exactly what's going to happen." The sculpture will stay on the roof for a year or so, then be shown in a gallery space. "It will be able to live on the ground as well as in the sky." A tower is a sanctuary, and perhaps, for Rachel Whiteread, it's a refuge from the psychic turmoil her previous public sculptures provoked. "I wanted something that was really quite quiet," she says. "I'm hoping it will have a nice, calm life up there; just sit there in a dignified way and look down on New York for a while." We will have to see, as Whiteread again makes the memories and dreams of a city visible.

Rachel Whiteread, West Broadway, New York City, opening May 1998, commissioned by the Public Art Trust.