Take one derelict building, add a novice architect and a bankrupt chef. When ready, charge £600 for dinner. Kate Spicer on how, despite all the wrong ingredients, Sketch changed the face of British dining

Sketch is the most controversial restaurant in years. Loved and loathed equally, it's a temple to modern opulence: the stairs drip with a resin that looks like blood and chocolate, video art is projected on the walls, the drinks menu looks like a newspaper, the toilets are giant glowing "pods". It's a highbrow Disneyland. You can eat cakes smothered in flowers and gold leaf in the Parlour for elevenses, go for cocktails and dancing in The Gallery downstairs or have a gourmet spree in the 40-seat Lecture & Library Room upstairs.

Even before it opened in August 2003, Sketch was London's most talked-about venue. And the chat got louder when a succession of celebrities became regulars - everyone from the Beckhams to Bill Clinton - and the exorbitant prices were revealed (starters come in at £78). It took me nearly two years to find someone with a decent enough expense account to bankroll dinner upstairs. It was sublime. I'll never go again, but it was as memorable as a week's holiday - just as well, as it cost £600.

Sketch is the dream of the half-French, half-Algerian Mourad Mazouz, 42. We meet at his sparsely furnished apartment in a mansion block on Portland Place. "Sketch was the project of my life. I wanted to do a temple, to do one big thing," he sighs in his heavily accented English.

Last week, Sketch won its first Michelin star, but it remains the biggest headache in restaurant history. What should have taken 18 months to open took four-and-a-half years and ended up costing £10.5m rather than the budgeted £4.5m. In its first year, it lost £1.5m; turnover was £6.6m, and the wage bill was £2.3m. Perhaps unsurprisingly, Mazouz did not draw a salary.

A Berber's son, one of eight children, Mazouz left school at 14 and moved From Algeria to Paris to live with his French mother. He opened his first restaurant after borrowing money from five friends, which he paid back in five months. A second restaurant - a hip, lively Maghrebi restaurant - was soon crammed with fashionistas and movie stars. By the early 1990s, Mazouz was one of France's hottest restaurateurs.

Arriving in London in 1995, he opened his first London restaurant, Momo, with less than £500,000. Since then, the Mazouz method has become famous: to open Momo, he got friends to contribute cash as well as help with the decorating, man the tills and give him their contacts. On the first night, Madonna threw a party for Stella McCartney and Naomi Campbell. They were still nailing the stairs down as Madonna walked in. But Momo was a hit.

Four years later, rumours started about "Mazouz's new place" - what was to be Sketch. The project was taking shape on Conduit Street in a magnificent, late-18th-century Grade II townhouse. One of Mazouz's friends, the designer Tara Bernard, daughter of the property magnate Elliot Bernard, introduced him to the building.

"The property company told me that Marco Pierre White and Saatchi wanted it, and they asked me to make something there. At first I didn't want to," Mazouz says. "I didn't want to do a big place. I'm a bistro man. The building was full of holes, but it was so beautiful. Just thinking about it scared me. I already had too much work. But then I started thinking of Sketch as the project of my life. I could create one big place where I could mix people, music, art, drink and food; all the things that were important to me could come together in one place."

A year later, he signed a 25-year lease, although he hadn't secured a licence. "Never take place without a licence. It's madness. But it was a total act of spontaneity, like all other places, I do it by my heart. And I jumped into - you know where you have the lion..." The lion's den? "Yes! I needed to make it happen. When you have a dream, you need to make it happen. I didn't even know how much money I would need." But he must have had an idea? "No. Who cares? You spend what you have to spend to make it happen."

It's an open secret that David Pears, the youngest of the heirs to the William Pears Group property empire, funded Mazouz in his new venture. They had first met in Paris. "He's an Englishman, he never had restaurant, I used to know him in Paris, he is younger than me, we would go to club, we'd 'ave dinner," Mazouz says. Pears stuck by Mazouz, eventually investing about £3m of his own money. Mazouz himself invested £1.7m, and the rest came from bank loans.

Mazouz started working on the design with a young French architect. Then English Heritage stepped in and said their plans were too wild for such a dignified old building, so they had to change direction. Eventually, the only way they could build a kitchen that would be approved by English Heritage was by digging a new basement. "And what 'appen when we start diggeeng? The building moved! Everyone was like, 'Hold on! Come engineer! Come architect! Come surveyor! The building is rotten!'" It was traumatic; work had to stop for eight months.

Mazouz admits Sketch nearly destroyed him before it opened. "I was depressed, scared, worried, stressed and didn't eat - I would get home at 3am every day. I was on my knees. We opened at the end of 2002, two-and-an-'alf year late, £6m over budget.

"But that wasn't the end. In the restaurant business, your first day of work is when you open to the public. Every night I have people telling me, 'Ah darling Momo, I like your loo but I don't like this thing,' or, 'Oooh, I love the other place more.' I didn't tell them that inside I was thinking, 'You come, so eat and shut up - it's a restaurant.' Why did they feel they could talk to me like that?"

The man in charge of the food was, and still is, Pierre Gagnaire. Despite being one of the most respected chefs in France, prior to his arrival in London, Gagnaire had gone bankrupt at his Michelin three-star restaurant in St Etienne, the first three-star failure since the all-powerful guide's creation in the Thirties. Although he relocated successfully to Paris and reclaimed his stars, the stigma and disappointment stuck. At Sketch, he wasted no time in rebuilding his reputation as a genius by dreaming up dishes such as suckling lamb rubbed in ewe's milk curd and potted crab with pig's ear.

Securing Gagnaire gave Mazouz confidence. "I was expecting a warm welcome when I opened. I expected people to say, 'My God! Look at this beautifully restored building, and we get to eat the food of the great Pierre Gagnaire.'" Instead, by the time they opened the hype had turned virulent. The clientele expected the £11m budget to be spent entirely on the interior and not, largely, on making sure the walls didn't fall down. The design was dismissed as "ridiculous" and "vulgar".

Then the food critics arrived, and feelings boiled over. A poll for the restaurant guide Harden's condemned the food as "pretentious tosh" and earned Sketch the distinction of being the most overpriced venue in London. "They said it was 'dog's breakfast', 'such a shame', 'disgusting' - they described the food as 'baby sick'," Mazouz recalls. "Hearing that after all the work we had done - well, all I could do was go home and stare at the sky."

Matthew Fort (then The Guardian's critic) did say that the high level of talent in the kitchens was "rare among European chefs", but awarded Sketch 0 out of 20 on the basis of the exorbitant prices. Mazouz recognises that Sketch is expensive but argues that it is good value for money. "There are 14 or 15 cooks, only 40 covers, and we use the finest ingredients. It's not expensive for what you get. In France, Spain or the United States, it's not unusual to spend this sort of money."

But Sketch looked like something of a folly - or a "midlife crisis", as one critic said. For Pears, it looked like a rich man's folly. Everyone expected him to bail out, but he didn't, and has assured Mazouz that he never will. After all, of his £300m inheritance, what's a few million among friends?

It wasn't just the food that came in for criticism; galleries refused to loan video art. Mazouz took it personally: "It was like they were saying, 'You are an Arab boy, you do Arab food very well, why do you change that?' Well, I am sorry, I grew up. I've lived in Europe for 25 years and I have dreams: I love music, and I've loved art video since the Eighties."

Eventually, with the help of the designer Mehrnoosh Khadivi, Mazouz persuaded Tracey Emin to make a video work for the space. Even so, the battle to be recognised as an exhibition space goes on. But, as Emin says: "I enjoyed exhibiting my work there and I think that [as a gallery space] it is getting better, and it is a serious venue. I wish people would stop slagging it off and realise what a great asset it is for London."

Slowly, though, people may be starting to get it. Last year, Sketch made an operating profit and Mazouz has learnt to be content . And, of course, there is his Michelin star. "I'm happy for my staff, who were jumping at the sky. But my goal is three stars." In the meantime, he's philosophical about his achievements. "I will never be happy with Sketch, because I am never happy. It will never be finished. But people are starting to respect it."