Serota rings in the changes at the Tate Britain

A celebrity party last night with 1,700 guests dancing until the small hours and signing their names on a brick wall time capsule marked the biggest change to the Tate Gallery in its 103-year history.

The gallery cast aside its Warhols and Rothkos to concentrate solely on 500 years of British art. The party, like the displays inside, was determined to emphasise that this is a celebration of British art, not a fusty history lesson.

Last night's opening marks the first half of Tate director Sir Nicholas Serota's decision to split the gallery in two. Tate Britain at Millbank will celebrate British art, both historical and contemporary, and in May, the opening of Tate Bankside will show international modern and contemporary art.

What was evident yesterday is that the Tate, through its display of British painting, continues to make art both fresh and exciting. The presence of Mick Jagger, Sir Paul McCartney and Madonna on the guest list alongside artists such as Sir Howard Hodgkin and Antony Gormley is merely a fleeting outward sign of that.

Far more important to art historians and the visitors who will flock to the Tate Britain is the imaginative way that Stephen Deuchar, its director, has hung the paintings. It is a hanging that provokes new insights into established names.

Instead of a chronological hang, the rooms each feature a different theme, be it portraiture, war or literature, and paintings from different eras are grouped together to show how artists from various centuries reacted to the themes.

When I revealed back in 1992 that Sir Nicholas was to split the Tate's collection into British and international modern, I feared Millbank might become the poor relation, with more excitement and interest surrounding the cutting edge art at Bankside. The first signs are that this will not be the case.

For a start, Mr Deuchar and his team have clearly been at pains to keep their share of the cutting edge. The Millbank site will keep the Turner Prize. There is a new neon sign by young artist Martin Creed on the portico with a text, opaque enough to be aimed for the Turner Prize, reading: "The whole world + the work = the whole world". There is new signage and typeface - a blurred Tate logo from designer Wolf Olins.

The contemporary is continually on view. Indeed, the first work one sees on entering the gallery is a contemporary one - Mona Hatoun's massive steel sculpture of a vegetable shredder. In most of the rooms there are striking, colourful examples from the present alongside the Old Masters. Damien Hirst is absent, but other Turner Prize winners and Britpack representatives such as Chris Ofili and Sarah Lucas, are present. David Hockney, who will doubtless also be at Bankside, has his own room there.

The juxtapositions in each room are striking. Francis Bacon's Seated Figure next to Hilliard's portrait of Queen Elizabeth I; Maggi Hambling is by Hogarth. It must be said that the contrast and context are not always revealing. A room supposedly on city life that has Edward Burra's 1930 The Snack Bar, a painting of people in a bar next to Lisa Milroy's 1995 Finsbury Square, an office block, tells us less about each artist than a display of those artists in context with their contemporaries.

But generally the approach is illuminating. Ivan Hitchens' wartime landscape Damp Autumn from 1941 is hung next to Gainsborough's A Wooded Landscape from 1797. They should have nothing in common, yet they respond to nature in strikingly similar ways.

"We are showing both unity and disunity," Mr Deuchar said. "That is the advantage of not showing the collection chronologically. We wanted to get across the idea that these works are familiar, but there is hidden potential and new insights when you see them in new contexts. Next year we will have more rooms opening when the [£32m] redevelopment is complete and we will be more able to tell the grand story of British art; and that will have a more chronological thread to it."

One excellent addition to the Tate is the labelling of the pictures. A deliberate policy change, it is at long last explanatory and vastly improved on previous Tate displays, with generous space given to each work. The days of overcrowded walls seem to be over.

In the Clore wing, the Turner bequest has been joined by a loan of Constable paintings and sketches, includingThe Hay Wain. Mr Deuchar has placed these alongside the Turners to contrast the artists and show Constable, the classic painter of safe landscapes, as a more radical artist on a par with Turner.

Sir Nicholas said: "International interest in British art is higher than it has ever been. Of course there's an interest in younger British artists, but there's also interest in what the older generation is doing and has done and there's a huge interest in British art of the past."

Mr Deuchar conceded that the contents of Tate Britain tended to be "Anglocentric". "We have a high proportion of English pictures in the collection, but as the years progress we will make our acquisitions more widely," he said.