I asked Stephen Daldry an unfair question in the Ritz Carlton bar in Berlin at two in the morning. Who, of the three stars he directed in The Hours - Julianne Moore, Nicole Kidman and Meryl Streep - is the best?

He very cannily said Tilda Swinton, who doesn't feature in a single Daldry production. But he put his finger on an important point. If there is an actress more beloved at the Berlin Film Festival she has exactly four days to be invented. Swinton's performance as the heroine of Erick Zonca's film Julia is an arthouse tour de force. The official competition films for the Golden Bear have yet to produce a likely champion, but Swinton is an exceptionally good bet for the Best Actress award.

In a festival full of pop music and disappointment the Brits are putting up a surprisingly lively fight. Mike Leigh's Happy-Go-Lucky, with Sally Hawkins as a dippy school teacher stalked by her driving instructor, looks healthier by the second. This comedy of grungy manners takes a lifetime to warm up, but it gradually turns into a doomy and gripping fortysomething drama of unexpected power.

Paul Thomas Anderson's Bafta-scooping and Oscar-likely There Will Be Blood is also in the official competition and likely to take on all comers.

The biggest buzz, though, has been reserved for a film not in competition, Filth and Wisdom. It's Madonna's directing debut and, while I haven't yet seen it, let's hope it is better than her husband's Swept Away. Maybe Guy Ritchie will make a record in response.

At the moment, though, Julia is leading the race for the big prizes. It is two ugly melodramas put together like a car crash. In the first half, Julia is a 40-year-old alcoholic who totters around nightclubs on 6in heels. She wakes up in various interesting places, such as the bath or on the back seat of her 1979 Chrysler. Her ex-boyfriend, Mitch (Saul Rubinek), has the thankless task of scraping up the pieces.

In the second half of the film Julia has the fantastically barmy idea of kidnapping a young boy, Tom (Aidan Gould), in the hope of extorting a $2 million ransom.

Julia is possibly the only American woman in the history of Hollywood who is actually grateful for waking up in Tijuana. Young Tom is obviously less than delighted at spending most of this vodka-fuelled road trip tied up in the boot. He is even less happy when a pair of council-estate Mexicans pinch him from the careless Julia and lock him in the most unpleasant lavatory this side of Trainspotting.

Zonca seems unaware that he has directed two different films. The fact that it's 138 minutes long should have given him a clue. It is also, for reasons that would defy Solomon, a scatty thriller that careers around Mexico like a deranged B-movie. The exotic visual flavours have a levity that the preposterous plot can never aspire to. There is a sprinkling of John Cassavetes, a fig leaf of Wim Wenders, and an indecent amount of Babel.

But Swinton is a total joy. She looks like a bad jigsaw. She slaps on the make-up at 9am and her face is falling off by lunchtime. Her scathing sense of humour is fabulously bleak. She is 40, single, lonely, and stalked by a mad female neighbour who also happens to be the most fervent member of the local branch of Alcoholics Anonymous. Her name is Elena (Kate del Castillo), and it is her son whom Julia steals.

What surprises, and in the end disappoints, is how easily the film caves in to becoming a conventional gun-toting thriller. They don't demean for an instant the skill and sheer front of Swinton's performance, but the bag-swapping tricks and twists feel derivative. They get in the way of the honesty.

Of course, Berlin is famous for hardcore gritty realism, and I can faithfully report that precious little has changed. Two of the most miserable films you could wish to see, called Robin and Teenage Angst, impressed me enormously. If there had been a razor blade on the next seat I might have been tempted to use it. What's exciting about this pair of German films, though, is that they are directed by two young talents who have clearly absorbed the grammar of cinema and made something special.

Robin, directed by Hanno Olderdissen, is filmed through the eyes of an eight-year-old boy. Mateo Wansing Lorrio is the unsettling young hero. His spooky nightmares about the foster home he has been forced to live in for three months frame his fears about returning home. The film opens with his squabbling parents introducing Robin to a shrieking baby before they disappear to the nearest pub. The views of grim concrete tower blocks speak volumes. There is nothing clever about the story but the soundtrack of squalor is exceptional.

Thomas Stuber's Teenage Angst has a terrific Hitchcockian sense of claustrophobia. A handful of handsome boys who attend a boarding school spookily similar to Colditz castle become dangerously obsessed by their own untouchable sense of power. Pure Rope. The cocktail of brains, wealth, and arrogance is a potent and lethal brew. A couple of sadists torment a boy who simply wants to belong, and their mind games degenerate into unspeakable violence. The film has a taboo edge of the neo-Nazi about it that sent a shiver down Berlin's spine.

The festival is also famous for documentaries, and Tony Gerber and Jesse Moss's Full Battle Rattle is an absolute peach. I'm not sure how they've been able to get away with this utterly stunning fly-on-wall piece about a “virtual reality Iraq” set up in the Mojave Desert to train American troops. It would be a sublime satire if it wasn't horribly true.

Soldiers are bussed to what is ostensibly a film set in the middle of nowhere to fight the “battle for Medina Wassi”, a town that doesn't exist. There are fake news reporters, fake television stations and fake Iraqis. There are also fake insurgents, fake bombings and fake crises.

The deadly serious manner in which the American soldiers deal with all this nonsense gives rise to some of the greatest and most surreal comedy I've seen. I now know that the occupation of Iraq is utterly doomed.

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