As yet another generation of European artists and musicians pours into the German capital, can it retain its credibility and cool?

The Wall made its first appearance 50 years ago this month and it became obsolete in 1989. But it remains the defining landmark of Berlin – it is everywhere and nowhere.

Here it is in the forecourt of the Westin Grand Hotel in Behrenstrasse, where the management, entirely devoid of irony, has stuck a notice on its fragment, warning that "Damages to wall are not permitted". Here it is again in a chi-chi department store – as part of the decor in the handbag section – communist tyranny defanged and enlisted in capitalist consumerism.

Time was when rock stars needing a quick fix of credibility (Bowie, U2) found recording in the shadow of the Wall did the trick. Even Lou Reed's Berlin and Pink Floyd's The Wall, neither of which had anything to do with the city, tapped into its evocative power to enhance their moods of depression and alienation.

The Wall is no longer the physical presence it was. Good riddance you might think. Astonishingly, though, it is viewed with perverse nostalgia by a generation of new Berliners. David Gibson, an English graphic designer who has settled here, explains the new one-upmanship: "There's a long joke about it 'not being the same since 2009 when all the east London dickheads arrived'; then someone says, 'Well I was here since 2007 before all the Spanish hippies came'; 'I was here in 2000 when all the squat-raves happened'; 'I was here in 1989 before the Wall came down', which is trumped by 'I was here before the Wall went up' and so on."

The longest extant stretch of the Wall is a 1.3km (1,400 yards) segment on the north bank of the Spree on which artists from east and west were invited to create an al fresco gallery in 1989. The East Side Gallery as it is known is one of the capital's most popular attractions. While I am there, a coach-load of Chinese tourists are giggling and lining up to be shot against the Wall (mercifully only for snaps). They pose in front of the famous mural of Brezhnev planting a full frontal smacker on the lips of East German leader Erich Honecker. The incongruities zing around as visitors from a notionally communist state engage enthusiastically in the mockery of communist leaders past.

The painting itself looks more technically accomplished than I remember from reproductions. It also looks remarkably well preserved. It is, in fact, new. Most of the original murals have peeled since they were created and the city authorities ordered a spruce-up in time for the 20th anniversary celebrations. Some artists such as Dmitry Vrubel (the Russian painter of the Brezhnev/Honecker mural) agreed to re-create their works in situ, while others refused because they regarded the fee they were offered as derisory. The city authorities carried on regardless, whitewashing the originals and commissioning jobbing painters to copy the designs. Furious artists are now suing the city for breach of copyright and have denounced the site as "Disneyland".

There is nothing remotely cartoonish about the Memorial to the Murdered Jews of Europe. Though the name is clunky, the word "murder" is emphatic. The site is not demarcated from its surroundings in Cora-Berliner Strasse; there is no wall. It simply segues from the Dunkin' Donuts and We Love Coffee franchises across the road. Above ground the memorial features nearly 3,000 grave-like concrete blocks or "stelae" of varying heights. Children play hide and seek in the maze of pathways; a middle-aged couple sit on one block eating ice cream while a group of French teenagers sunbathe on others. The memorial looks lived in.

The carnival atmosphere ends abruptly in the information centre underground. Here the coffered ceiling reprises the stelae motif, no longer as blocks but as corresponding hollow rectangles. We are inside the graves. Chattering school groups fall silent quickly as they come face to face with the unflinching testimony of the exhibit. It sets out to show the Holocaust was personal – committed by individuals against individuals. One particularly harrowing photograph shows a mass shooting; amid the naked corpses a policeman is despatching survivors, one of whom is looking up at him as he takes aim. There is no other word for it but murder.

Throughout Mitte (central Berlin) there is an inevitable disconnect between the terrible 20th-century history of the city and its modern face. The Brandenburg Gate and Pariser Platz are all but unrecognisable from the archive photos of the wasteland of 1947; even more recent postcards from the 1980s – showing the curve of the Wall as it isolated the forlorn and damaged gateway from the west – seem to be from a bad dream.

The gate has been restored to its baroque splendour; new buildings including the US and French embassies and Frank Gehry's DZ Bank have risen. There is a party going on in Pariser Platz: a hip-hop crew is busting a few moves; rickshaws and novelty bikes scrape untidily across the cobbles and tourists can pose for cheery novelty photos with "soldiers" dressed in GI and Red Army uniforms. It's another of those jarring Disneyland moments – though considerations of taste dictate that we are spared Third Reich and Stasi uniforms.

The battle for the soul of Berlin is being fought district by district. A wave of gentrification is sweeping across the city. It has by common consent already claimed Prenzlauer Berg in former East Berlin. There is tangible resentment against the wealthy incomers who have transformed it from the bohemian idyll it was in the early years after the Wall came down. There is a substantial constituency that wants Berlin to keep it real, to remain "poor but sexy" in the memorable phrase coined by mayor Klaus Wowereit.

Tim Raue, a chef and a rare native-born Berliner, is conflicted. His eponymous Michelin-starred restaurant in the smart district 61 of Kreuzberg adjoining Mitte is shamelessly upmarket. His Asian fusion style is delicate and refined. But instead of discussing the exquisite abalone with ginseng and tarragon we are talking about his tearaway youth as the only German member of a Turkish/Arab street gang called the 36 Boys. It took its name from the more rundown 36 district in Kreuzberg and Tim talks with evident nostalgia of his days fighting the police during the annual May Day riots.

An affluent clientele is requisite for his restaurant to remain a success but Tim cannot conceal his disdain for gentrification. "In Prenzlauer Berg there are no native Berliners. They are all from the south of Germany. They have a stick up their arses." He warms to his theme. "The soul of Berlin is freedom. And everyone can do what he wants. No one is there to judge you or tell you what to do and when and where to do it. This is what Berlin gives to you."

While the south German bourgeoisie is getting a mixed reception, post-unification Berlin has extended a fuzzy welcome to the broke and footloose of Europe. There is, however, a fin de siècle feel to "multikulti" Kreuzberg, routinely referred to as the hippest quarter of Berlin where everyone, employed or otherwise, seems to be a photographer, designer or DJ. And all speak English.

David Gibson says: "I think many people feel a little disappointed that they missed Berlin's heyday of 15 or so years ago when it was a lawless decapitated city, with plenty of squats and ultra-cheap housing."

"Gentrification is a tsunami," concurs Georg, a video artist. "Kreuzberg is already gone," he says in disgust. His friend Regina, a singer, tells of a crowd in the street she witnessed earlier in the day. She learned it was a queue to look at a flat that had become available. We are chatting in Das Gift, a bar and art space owned by a member of the Glasgow band Mogwai; the bar has an excellent selection of single malts and the air is thick with smoke and Scottish accents. It is in Neukölln – the next area being colonised by Euro-bohos priced out of Kreuzberg.

The following day I am standing on the double deck Oberbaum Bridge which separated East from West Berlin. During the Cold War it was another symbol of a divided city. The distinctive neo-gothic turrets have been restored and stand proud again in the middle of the Spree. A bright yellow train is making its way across the upper bridge from the former east. On top of one of the carriages I am startled to see two figures silhouetted against the blue sky, sitting on black plastic garden chairs. They stand up. They are both wearing carnival masks; one of the lads has a hoodie. They dance wildly before flinging their chairs into the river as the train crosses the central span. One of the lads does a handstand on the moving train and then they both run gleefully along the roofs of the carriages as the train clatters west into Kreuzberg. It's a random, joyful and dangerous display. And it seems an assertion of territory – without walls.

Compact Facts

How to get there

British Airways (0844 493 0758; currently offers three nights at the five-star Hotel de Rome, Berlin, from £499 per person, including return BA flights from Heathrow and accommodation with breakfast. Classic double rooms at Rocco Forte's Hotel de Rome (00800 7666 6667; start at €260 (£228) per night including taxes.

Further Information

Restaurant Tim Raue (00 49 30 25937930;