We've all heard stories of Babylon. But then that's hardly surprising - no other city has been so vilified. Which is no bad thing as far as this once proud capital of a flourishing empire is concerned. Because a villain, as any lover of literature well knows, is more vividly beguiling than his virtuous foil. Take Milton's Satan as the most famous example. He is far more compelling than his pious God. Which is why, though hundreds of years have passed since this sprawling Mesopotamian metropolis crumbled back into the dust of what is modern-day Iraq, its legends - the tower of Babel, the mad Nebuchadnezzar, the feast of Belshazzar and the eponymous whore - remain like great monuments on the horizons of the imagination.

But how true are these tales?

This week the British Museum opens Babylon: Reality and Myth. It is the last in a sequence of three shows on the subject that have taken place this year, as a trio of European institutions - the British Museum, the Pergamon in Berlin and the Louvre in Paris - have teamed up, pooling loans and expertise, to create shows that can not only fascinate a broad public but offer a serious opportunity for scholarship as well.

Now, as the British Museum curators are passed whatever is the Mesopotamian equivalent of the baton - that beautiful carved onyx sceptre would probably do - they create their own distinct (but related) version of the show. Their most notable decision is to narrow the historical focus. They look at the story of Babylon through the spyhole of the 40-odd years from 605 to 562BC, during which the great Nebuchadnezzar ruled. These were the years in which the city's greatest monuments were constructed, including the fabled hanging gardens (one of the ancient world's seven wonders), and in which Jerusalem was captured and its people taken prisoner. It was in this narrow time frame that most of Babylon's legends find their source.

So don't worry. Your view won't be restricted. Rather this show follows a broad sweeping course, looping through history as the River Euphrates once looped through Babylon's sprawl. The visitor, meandering along between banks of display cases, is effortlessly carried from the tiny chiselled dot that marks Babylon in the middle of the world's oldest known map to the modern-day legacy of this once magnificent city in the Boney M song, Rivers of Babylon.

In between you will find anything from runic clay tablets through totemic statues to medieval manuscripts; from papyrus scrolls through the paintings of European masters to the extravagant fantasies of Hollywood. You will meet a cast of characters that runs from the semi-legendary Assyrian queen Semiramis through the Greek historian Herodotus to the Iraqi dictator Saddam Hussein, who, having brutally seized power over the nation state in which the last mounds and ditches of Babylon now rest, set about legitimising his position by associating himself with his country's ancient past. He erected his own huge (and criminally destructive) palace on the site of the ruins and created dozens of propagandist images that set his slightly tubby moustachioed form in ancient Mesopotamian scenarios. And, yes, he does look ridiculous as a chariot driver.

But actually he is doing no more than following the long local tradition that Nebuchadnezzar himself was happy to adopt when, commissioning stone-carving scribes to memorialise his latest building, he made them punctiliously imitate an archaic script. He wanted to arrogate the authority of antiquity. It's our own 'Ye Olde Tea Shoppe' principal at work.

So what about the reality? We all revel in myth, as this show makes clear. Its diverse array of paintings bring the city of Babylon to lurid life. Few works may be first rate: a poster-scale replica has to stand in for Breughel's Tower of Babel and a delightfully silly gimmick (see if you can spot it) for Rembrandt's splendid Belshazzar's Feast. But, bringing together anything from a clutch of giddying towers of Babel through a dramatically expressive Daniel in the Lion's Den, to a vast John Martin canvas that captures the city's apocalyptic destruction in all its 'authentic' detail, this show amply illustrates the hold that the stories - especially the bad ones - have on our creative imagination.

How can the bare facts of truth compete? The curators play their trump card immediately. As you step into this show you step into a reconstruction of Nebuchadnezzar's palace, the marvels of its shimmering presence reconjured by the glazed brick reliefs (from the Pergamon, never before lent to Britain) that set the totemic beasts of Babylon's imperial god Marduk and the lions of its kings prowling through our imaginations as they once prowled the walls of the great processional way.

But what next? For all its notoriety, little remains of Babylon beyond a bewildering tangle of earthworks. And even these - as a final and very important section of the show makes clear - have come under increasingly severe threat since the IraqWar, as military sandbags are heedlessly loaded with potentially priceless archaeological fragments, as gravel is scattered to make helipads and heavy vehicles shake the very foundations of our human story.

Until this destruction can be halted and careful excavations begin, scholars in large part depend on little baked-earth tablets for information. Some 130,000 of them covering 3,000 years of history can be found in the British Museum's collection. A selection of them, as well as a few important loan scripts, have been brought together for this show. They look as inscrutable as patterns of birds' feet in the Euphrates mud, but luckily experts are there to read to us. As you stare at the strange plaited surfaces, overhead speakers translate. I hope you will be able to hear them. Crowds will make it hard and, though exhibition planners are setting a low maximum capacity, still try your utmost to visit at an unpopular time. The gallery spaces are often narrow and the story is complex, but its details, if you can find the time and space to take them in, are as delightful as they are illuminating.

These tablets of cuneiform encode the real story of a city. Slowly, you can construct the tower of Babel in your mind, for example. Nebuchadnezzar certainly did build a massive temple, though it was not the round Colosseum-shaped building that Breughel envisioned but a vast ziggurat. Nebuchadnezzar was not a brutal tyrant but an ambitious and pioneering leader who created in his capital a famed centre of learning, many of whose legacies are still with us today

Sometimes, one feels a little reluctant to let go of the stories. Blake's iconic image of a mad king crawling through the caverns of his own mental torment is the picture of Nebuchadnezzar that we all recognise. Now we find that, thanks to the Book of Daniel, Blake gets the story wrong and that it was a later successor who went mad. And the whore of Babylon, apparently, is a prime example of a rumour run madly amok, nor did the city come to an appalling apocalyptic end.

But truth isn't always a killjoy. Archaeologists, as yet, have no evidence of Babylon's wondrous hanging gardens (though sites where they might have been have been plausibly identified), but by studying the gardens - right down to a list of plants - of other kings they can give an idea of what Nebuchnezzar's marvel of horticultural engineering might have been like. And how much more luscious it suddenly sounds when we know that he might have grown 'slave-girl buttock plant' - though, I doubt this will be one of the ingredients in the Babylonian soups that the British Museum restaurant plans to serve.

The more that you learn of the truth, the more fascinating this show becomes. For thousands of years, Old Testament stories have kept our tongues wagging because these stories were taking form at about the same time as the Jews were imprisoned in Babylon. Their tellers had an axe to grind. But like all the best gossip, their scandals grew around a grain of truth.

Discover this grain - it can be as slight as the eunuch whose name is recorded on a Babylonian tablet as having paid gold at the temple and who then turns up again in the Bible as one of the conquerors who came to Jerusalem in 587BC - and a whole new area of fascination opens up. You start to find out who the real Babylonians were and, through them, to discover their deeper connections with us, from their first development of a monotheistic spirituality through their fascination with horoscopes to their divisions of the hour into 60 minutes.

The reality, it turns out, can be even more vivid than the myth. Babylon may not be as bad as it has been painted. But that doesn't mean that it's boring for, if the moustache-twirling villain is well served by the novel, the subtle complexities of a hero are best captured in nonfiction books.

Babylon: Myth and Reality is at the British Museum, WC1 (020-7323 8299; www.britishmuseum.org), from Thur to March 15

THE STUFF OF LEGENDS - What not to miss at the show

The Babylonian map of the world The oldest known mappi mundi puts Babylon at the centre of a globe encircled by seas. Three years ago a missing piece was discovered, to great excitement, in a tray of random fragments.

Glazed brick relief showing a mushussu dragon On loan to Britain for the first time, this elegant dragon with snake's head, lion's body and eagle's claws was sacred to the Babylonian god Marduk, to whom the great ziggurat of Babel was consecrated.

Daniel in the Lion's Den In his delightfully expressive animal painting Briton Rivière includes a real Assyrian relief on the walls of the den, the original of which can now be seen in the British Museum.

An oracular fish “If a fish lacks a left fin a foreign army will be destroyed,” reads the ominous inscription on this little bronze mud skipper.

Tablet listing the plants in a royal garden at Babylon A cuneiform record of everyything from the mangel wurzel through melon gourds to a “slave-girl buttock plant”.

SIGNS OF THE TIMES - Babylon in context

612BC Fall of the Assyrian Empire to Babylonia and Media

605-562BC Rule of Babylon by King Nebuchadnezzar

587BC Capture of Jerusalem and deportation of Judaeans to Babylon

c580-c500BC Life of Pythagoras

c563BC Birth of Buddha

551BC Confucius is born

539BC Conquest of Babylon by the Persian King Cyrus, who allows exiled Jews to return to Jerusalem

c509BC Roman Republic established

470BC Birth of Socrates

447-432BC Building of the Parthenon in Greece

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