The first time we see Pauline and Juliet they're screaming, running through a park, covered in Pauline's mother's blood. They've just bludgeoned the woman to death. Then go back many months, to when the English girl Juliet first arrives at school in New Zealand and, through a mutual love of Mario Lanza records and shared experiences of serious childhood illness, the two girls become firm friends. They mould plasticine models of the aristocratic cast of Borovnia, a shared fantasy world about which they write a long, self-absorbed novel. But the adults are less sure about the innocence of this friendship, espying nascent lesbian undertones, and when moves are made to separate the girls forever, that's when ill-conceived plans to murder begin to hatch.

The story told by Peter Jackson's fourth feature is a true one. Much of the script is taken directly from Pauline's diaries, books which form the backbone of the most celebrated murder case in New Zealand history. What's most shocking about this film, however, is that it comes from the same hirsute writer/director who previously brought us the lame, effects-driven alien-cannibal feast Bad Taste, Muppets-on-acid puppet flick Meet The Feebles, and lawn-mower crazy splatter-fest Brain Dead. Nothing in his sledgehammer back catalogue even hints at the subtle hues of character and obsession that drift through this remarkable film.

There are some concessions to Jackson's past, mainly in the particularly dangerous rendering of Borovnia as, if not so much flesh and blood, then at least as living, menacing plasticine. It's a calculated risk - to allow us into this strange world that so entrances the girls - and it's one that for the most part works extraordinarily well. But the main strengths of the piece are its players, and in particular the two newcomers.

The British Kate Winslet is splendid as Juliet, the over-bright, arrogant new girl correcting her teacher's French lesson. But better is Melanie Lynskey as the more demanding Pauline, a sullen, dour girl who finds in this new friendship everything her life lacks. Tellingly, it is her and not the more obvious Juliet who ends up losing her virginity to one of her mother's lodgers. The energy of the film comes from the interplay of the two and its ability to convince an audience that the relationship could have been intense and special enough to provoke the murder that will eventually be its undoing. (When they were released from gaol after six years it was on the strict understanding that they never see each other again.)

Given the chainsaw-like subtly Jackson has brought to his previous work, his lightness of touch here is a revelation. He evokes an Antipodean 1950s with much the same sureness that we last saw in Anne Turner's marvellous Celia a few years back, a film, given its intelligent use of fantasy and reality, to which Heavenly Creatures bares considerable comparison. The under-played, under-elaborated eroticism between the girls brings to mind Weir's classic Picnic At Hanging Rock. The final, shattering ten minutes will leave audiences numb like little else.

Heavenly Creatures, alongside the films of Vincent Ward and Jane Campion, is one of the standout works of recent New Zealand cinema, a complex, sensitive exploration of childhood friendship writ large. Oscar nominated (for its screenplay) this is as original and compelling a film as you could imagine.