Katalin Varga, Peter Strickland, 82 mins, (15)

In an atmosphere of mist-cloaked menace and gothic doom this British directed thriller is both timeless and bang up-to-date

Peter Strickland's Katalin Varga is a powerful, unsettling film. It's also, as we journos say, a good story.

Aspiring British director winds up teaching English in Budapest, then inherits some money and stakes it all on a long shot – making a feature film in Hungarian. The film plays in competition in Berlin to rapturous acclaim, prompting much discussion about why it's increasingly the case that practitioners of art cinema have to leave Britain if they want to make something truly distinctive. Mind you, you can see why Strickland had to make his film in Hungary: this tale of a woman's revenge, shot among looming mountains and featuring much firelit dancing to gypsy violin, wouldn't have been nearly as convincing set in his native Reading.

You can't help wondering also whether Katalin Varga would have had the same impact if it had been made by a Hungarian. I'm sure it would have been noticed, rather than passed over as just another low-budget eastern European offering. But undeniably, what's so fascinating about Katalin Varga is the singular feat that Strickland has brought off. He doesn't merely pastiche a certain old-fashioned strain of eastern European art cinema – the film could almost be a rediscovered gem of the Sixties or Seventies – but truly gets under the skin of the films that inspire him, so that Katalin Varga effectively becomes the genuine article. Strickland's film is, if you like, a forgery or an imposture, in that it's not exactly what a British director would "naturally" produce. But, notwithstanding the anomaly that it represents, the proof of Katalin Varga lies in the dramatic chill that, little by little, this subtle but powerful film comes to impart.

Filmed and set in Transylvania, Katalin Varga takes place in the present, although only the occasional baseball cap or mobile phone tells you that. Otherwise, the story is so timeless that we could be in the Middle Ages, or watching a historical tragedy that might have inspired an opera by Bartok or Janacek. The story starts on a classically ominous note, as men claiming they are police come to a house at night looking for one Katalin Varga. Who is she, and what has she done? And what has been done to her? No sooner have we met Katalin (Hilda Peter) than her angry husband is ordering her and her young son (Norbert Tanko) to leave their village. Katalin tells the boy they're off to visit his grandmother, then the pair ride their horse-drawn cart away from the green haven of their village into a landscape over which mountains loom with the mist-cloaked menace you tend to expect in Transylvanian tales.

There's undoubtedly a conventional streak of gothic doom at work: the look of terror that comes into Katalin's eyes as she gazes into a dark forest, or the way that children have a habit of singing folk ballads about sheep and marauding wolves. But Strickland consistently holds back from generic nightmare to pull his story back to the everyday. When Katalin settles her first debt with a man from the past, her violent act is cloaked in darkness: only later is his fate revealed, with concise black humour, by a shot of his boot protruding from undergrowth, as his mobile rings in the background.

For much of the film, the visual and narrative language is so simple that we might easily think we're not watching anything terribly special. But the atmosphere and tension gradually heighten until we realise that Katalin's journey is likely to be strictly one-way, for such is the inexorability of tragedy. In Britain, Strickland would no doubt have been leaned on to supply a "redemptive" ending: left to his own devices, he has taken the much tougher path that the story demands.

The film comes to a head in a mesmerising sequence as Katalin takes a rowboat ride with Antal (Tibor Palffy), the man she's come to confront, and his wife (Melinda Kantor). As she tells them the awful story we've been waiting to hear, Strickland stops showing us Antal's nervous reactions and concentrates on Katalin, leaning back with a disarming smile, water rippling behind her as the boat seemingly spirals away on the current. Eventually Katalin's language takes an eerie turn into the language of folk tale, suggesting that by telling her long-guarded secret, Katalin has, at last, opened up the gates of her own madness. New name Hilda Peter has kept us guessing about Katalin, shifting mercurially from mood to mood: finally unveiling her character's soul in this scene, Peter gives a performance of absolute calm command, one of the year's finest.

The film's most overly offbeat aspect is its soundtrack, with an other-worldly score, part choral, part electronic, by Steven Stapleton and Geoff Cox, and a genuinely enigmatic sound design: the climactic tragedy is announced, unnervingly, by an insistent tapping, as if the local woodpeckers are getting restless. Katalin Varga is a terrific, unshowily accomplished film, and it would be fascinating to see what Peter Strickland might do in a British setting. But then, why should he? It's a big world out there beyond UK cinema, and Reading's loss is Budapest's gain.