Charles Saatchi: Arty Saatchi

Charles is the one who causes a sensation every time he opens his wallet in an art gallery. His latest wheeze: create a museum dedicated to his private collection and designed to take Nicholas Serota and Tate Modern down a peg or two

The story reads like a comedy script. Two young Jewish immigrants are eager to make their fortunes in the advertising industry, circa 1970. They have a lot of ideas but not much else. A very important potential client is on his way over to see the office of the dynamic new company they have pitched to him. Unfortunately the office is bare. The brothers have had no work, so they have no staff.

Then Charles, the elder of the two, has a brainwave. He goes out on the streets of London, cash in hand, searching for people who might pass for thrusting young advertising executives. Before long a dozen or so hired strangers are pretending to be busy at their desks while Charles and Maurice Saatchi charm their client into signing a contract.

Apocryphal or not, the story is still told 30 years later because it contains a truth about Charles Saatchi. He is a showman, a master of illusion, whose great trick is to manufacture desire – to make things appear bigger, more important, more attractive, more desirable than they are.

"I think of him as the Wizard of Oz," says Charlotte Mullins, editor of Art Review magazine. "He has created this vast and impressive empire, but in the middle of it all, behind the scenes, is just this one small man working away. He sets off all the hyperbole and lets that do the work while he stays hidden."

Saatchi likes to spend his £120m fortune on art. He is often seen strolling through degree shows and in private galleries, talking to artists and curators. Although usually unannounced, his presence soon becomes known. "A buzz goes around the room when Saatchi arrives," says Mullins. "People know he can make them."

Lately, the collector and dealer has been in negotiations with English Heritage to open a new exhibition space for his unrivalled private collection. He has at least 2,500 pieces by 350 artists and wants to show them in the debating chamber of the former Greater London Council building, County Hall, in south London. Such a bold venture will need all the publicity it can get, which may explain the sudden flurry of hyperbolic media talk about the "struggle for supremacy between the two titans of British art". These stories, wherever they come from, depend on the idea that Saatchi is involved in a venomous rivalry with Sir Nicholas Serota, the curator of Tate Modern, which is a short walk along the river from County Hall.

In 1997 Saatchi took over the Royal Academy to show off his collection under the title "Sensation". More than 300,000 people came to see it. Suddenly the nature of art was a talking-point again. Was a portrait of Myra Hindley made from children's handprints good art, bad art or art at all? Was an unmade bed strewn with soiled knickers? Was a sheep in formaldehyde?

Three years later, Tate Modern was opened by the Queen. It was hugely popular with the public and regarded as one of the best art galleries in the world. There was, however, very little Britart in it because Saatchi owns the biggest and best works by Damien Hirst, Rachel Whiteread, Chris Ofili, Jake and Dinos Chapman, Sarah Lucas and Tracey Emin. He had bought everything they had done very early in their careers and driven up the prices by helping to market these Young British Artists. Tate Modern hoped Saatchi might lend or donate some of these works. He announced his own new museum instead.

Feuds make good newspaper stories, of course, but they get in the way of making money, as the Saatchis know well. They were involved in three successful Conservative Party electoral campaigns and masterminded the "Labour isn't working" ad – one of the classics of political advertising. Maurice Saatchi is a Tory peer. Charles is discreet about his politics these days, but he has been more influential than ever under Labour.

"As the Medicis were well aware, art is a great image-enhancer," says Louisa Buck, author of Moving Targets 2: a User's Guide to British Art Now. "The Catholic Church was quick to forgive the banking dynasty the sin of usury, just as the contemporary art world tends not to be too picky about the politics of those who patronise it."

Not that Saatchi is short of critics. When he gave 100 works to the Arts Council, people said it was because he had run out of storage space. When he funded bursaries and commissions for students at four London art schools, they said it was a way of getting new work on the cheap.

Saatchi is thick-skinned. A former bridge partner was impressed by his daring but not his manners. "He's a monster. Charles is brilliant at games of any kind, but he is also demanding, tetchy, intolerant and petulant while he's playing. He holds court and takes over the table, yet he has no obvious charm. This is a man who requires adoration. But he comes across as cocky, smug and irritable."

Charles Saatchi was born in Baghdad, Iraq, 58 years ago but came to Britain with his family in 1947. Maurice was the business manager and Charles the creative mind. His gift for the striking visual image was shown by their campaign for Silk Cut cigarettes, which circumvented advertising restrictions by showing nothing more than a slashed piece of purple silk. By 1986 Saatchi & Saatchi was the biggest advertising agency in the world, but Charles and Maurice left in 1994, after a revolt by shareholders, and formed a rival agency, M&C Saatchi.

Charles was divorced from his first wife, Doris, after 14 years. He proposed to Kay Hartenstein, an art dealer, two days after they met at a gallery. They married in 1990 and had a daughter, Phoebe. The couple were divorced last August on the grounds of his "unreasonable behaviour".

Saatchi has developed a deep friendship, perhaps more, with Nigella Lawson, widow of his friend John Diamond. Lawson has described Saatchi as "a very good friend" and chosen not to comment on reports she is about to move into his home in Belgravia, although she spends much of her time there. "Some people see me as a tragic heroine and that's what makes me acceptable to them," she has said. "The idea that I might be happy is unforgivable. Well, I'm sorry. It's better to be happy."

Saatchi may well be sharing in that happiness, but there are those who say he has lost his touch when it comes to art. Nothing he has done lately rivals Sensation, and his attempts at branding new groups of artists with names such as the Neurotic Realists have been unsuccessful.

There is evidence, too, that some young artists do not want to sell to him. However big their student overdraft, they prefer not to accept Hirst's assertion that "art is about life and the art world is about money". The problem, as they see it, is that because Saatchi buys in bulk he also sells a lot. Some dealers and collectors still take the view that if he's selling everything by a particular artist it's not worth buying. That can ruin careers before they have even begun.

"He used to be seen as the hand of God," says Ms Mullins. "Now artists are increasingly refusing to believe in him." The wizard will need to weave some new spells to keep the magic going.