Arriving at the tiny airport of Mytilene on the Greek island of Lesbos, I walk past a sign advertising "Lesbian wine". I'm on my way to Eressos, a small Greek village where, I am told, lesbian tourists are 10 a penny. This island in the Aegean Sea is to some lesbians what Torremolinos is to 18-30 holidaymakers - the destination of choice for those who want to sunbathe and party with kindred spirits, and be open about their sexuality.

Lesbians began to visit the island in the 70s, and have been coming back ever since. But now trouble is brewing. Three Lesbians (natives of the island of Lesbos) have submitted a legal challenge in an attempt to stop the Homosexual and Lesbian Community of Greece (OLKE) from using the term "lesbian". The use of the word to denote a sexual preference derives from the island's association with Sappho, the ancient poet who wrote about her love for women. But according to Dimitris Lambou, editor of the rightwing publication Davlos (Torch), and two female colleagues, using lesbian in this way "disgraces them around the world"; islanders, they say, are suffering "psychological and moral rape", due to being confused with lezzers such as myself.

It is early morning when I arrive in sleepy Eressos, just days after the international press got wind of Lambrou's intervention. The narrow beach stretches for three kilometres, ending with the huge, sheer rock from which Sappho leapt to her death. Greek music plays in the many bars and tavernas, and a van selling bread crawls through the winding streets.

I head for the popular The Tenth Muse, a lesbian-run bar in the main square. The local cats sit expectantly, waiting for scraps and attention. The animals are as reliant on lesbian tourists as the villagers. For all the hype about Lesbos being the world's top place for lesbians, this small village has only two lesbian-run bars open outside high season, both sharing a space in the square with a huge sculpture of Sappho.

Lena Tzizounaki runs The Tenth Muse. She came from Athens to live in Eressos 11 years ago, and tells me that the only arguments that occur in her bar are between lesbians, rather than the women clashing with the locals. "Mainly, though, the women have a great time together," she tells me. "It makes for great people-watching, because there is so much holiday romance."

At the bar next door, four men, all with thick moustaches and huge bunches of keys hanging from their belts, drink espresso and smoke strong cigarettes. I ask if they mind the lesbians. "So long as they leave our women alone, they are welcome," chuckles one.

Dina Astalaki, owner of the other lesbian bar and restaurant in the village, Aubergine, is known affectionately as Mamma Eressos, because she looks out for the younger lesbian tourists. Astalaki lives with her German partner of 13 years. "Sometimes the women get a bit over the top," she says, "particularly in high season. But it's nothing compared with what groups of men get up to on holiday, I would imagine."

There has been the odd scandal surrounding the lesbian tourists on Lesbos, but not for a while. Eight years ago, the Candy Bar, a lesbian bar in London, organised a group trip to the island. Flyers advertising a "Wet Pussy Party" flooded Eressos, prompting the then mayor of the village to try to stop around 100 British lesbians from disembarking from their cruise ship for a stop off. Behaviour was lewd and loud, and to make matters worse for the islanders, the group was accompanied by a film crew from Channel Five, making a fly-on-the-wall documentary, Lesbians Go Mad on Lesbos.

"We are still recovering from that," says Anastasia, who works at the Parasol bar which is perched on the seafront. "Some of the women were like men. They were shouting things to women that few men would dare, such as 'Lovely tits'." One, she tells me, had a "full beard". What disgusted Anastasia most was that they had brought their own stripper, to entertain them in the evenings. "We would not tolerate local men doing such things, so why would we put up with lesbians behaving like pigs?"

Not long after this debacle, there were calls for the lesbians to be "fenced off", out of the public eye, when they visited Lesbos. The head of the island's hotelier's association at the time said that the women can be "rude and wild", "look like men" and "offend the locals." But things have calmed since then.

Many returning tourists choose to settle in Lesbos and take jobs, or run their own businesses. From 60% to 70% of lesbians living on the island are English and German, but a sizable minority are from mainland Greece.

Selina Firth lived in Eressos between 1990 and 1995, and returns regularly for holidays. She, along with increasing numbers of lesbians from the UK, began to visit Lesbos in the early 1980s when cheap charter flights made it easier to get to. She later decided to sell off her possessions, and move to Eressos. "At that time, there was only me and two other lesbians living here," she says, "and the holidaymakers would live in benders on the beach in the summer, which pissed the locals off no end."

The women who came to Eressos in those days were mainly lesbian feminist separatists, Firth says. They were angry and confrontational with men, and would clash with them regularly. The men, in the main, she says, were hardcore misogynists, who hated not having sexual access to the women, and would become deeply offended at any sign of affection between them. There were a number of attacks on lesbians, including sexual assault, and confrontations between male islanders and lesbian tourists were commonplace. "This square," says Firth, referring to the area with the two lesbian-run bars, close to the Sappho statue, "used to be inhabited almost entirely by local families on Saturday nights. There would be an uproar when women, after a few drinks, would lose their inhibitions and start snogging and sitting on each other's knees."

Firth says that during the time she lived in Lesbos, she fell madly in love with a Greek woman who used to visit from Athens. "But she would not even dare hold hands under the table when we were out," she says. "And at the time, it proved impossible for two women, one of them Greek, to keep a relationship going. The macho, village mentality was against us." That woman was Dina Astalaki, owner of Aubergine and now one of the most prominent lesbian businesswomen on the island.

Eventually, the villagers grew used to the lesbians, and in turn, the women less confrontational. "Some of the villagers knew I was a creative, and one of them asked me if I would make a sign for his shop," says Firth. "Soon, I was doing them for loads of the small businesses, and we became friendly at last."

Male villagers, says Firth, were almost totally unused to doing business directly with women, so that was a learning curve, too. "Now, us women, lesbians to boot, own and run our own businesses."

There is a terrible culture of machismo in Greece, I am told by countless people, but one that is weaker now that the men are living among independent, strong women. "When I first lived here, I felt like a third-class citizen," says Firth. "A woman, foreign and a lesbian. But now I feel accepted, and equal."

Sasha Roseneil also recalls hard times in the early days of lesbian tourism to the island. "There were some tensions back in the 80s, when there were lots of women camping there for extended periods of time," she admits. "But since the free campsite has more or less been dismantled, and the lesbian tourists bring in more money, there seems to be widespread acceptance of this niche market that Eressos has developed."

George, a waiter in the village, says he has no problem with lesbian visitors to the island. "How can I mind them?" he asks, "They are our livelihood. People who tell them they are not welcome must have too much money. These girls spend a lot. They drink like men."

Partly because of the documentary, and popular stereotypes, it is easy to imagine Eressos being inhabited by shaven-headed, butch women, covered in tattoos, and carrying solar-operated dildos in each hand. But the women I met in the village are anything but.

What do the visitors think about Lamrou challenging their right to be called lesbians? "Thank God Sappho was born on Lesbos, not Rhodes," says Sandra, on holiday from Leeds with a group of friends to celebrate her 60th birthday. "Or we would be stuck being known as Rhodesians."

Lisa Evans is in Eressos for her fourth season, working at Aubergine. "Lots of Greek girls, from Athens and other islands, come here to be together," says Evans. "They can be themselves, and blend into the crowd."

Some women come to the bar to "pull a new girlfriend and party hard", she says, whereas others come for birdwatching, walking, and, of course, to take in the significance of being in Sappho's birthplace.

"There is lots of trapping off going on here," says Evans, "and folk back home say to me, 'You must have a new one on the go every week.' But I'm too busy working. I have to do the bottling up when the bar closes."

"Lesbos has often felt like a wonderful retreat," says Roseneil. "In Eressos it was OK to be a lesbian, to hold hands with your girlfriend, long before it was in England."

There are few visible local women in Eressos, but I speak to an older shopkeeper, who tells me that the lesbians bring some excitement to what is a "very ordinary Greek village".

"I could easily be a lesbian if I was younger," says another local woman. "It would be far easier. Those women are lovely and I have a horrible husband."

Mercia Powis moved to Lesbos from the UK five years ago, and now runs a successful estate agency. "The Candy Bar debacle, and the documentary" she tells me, "it destroyed the image of this island, and the image of lesbians who come here. The women were portrayed as "louts, ladettes, and sexual predators". Was it an accurate portrayal? "Not far from the truth," admits Powis.

During my time in Lesbos, I see no bad behaviour. The women are lovely - friendly, amusing, respectful and great fun. In the evening they dance and roar with laughter in The Tenth Muse, downing Metaxa, smoking Greek cigarettes and generally having a great time. It could, aside from the smoking, be any lesbian bar in Hackney or Soho. I have seen far worse behaviour from British and other European men in holiday resorts.

Wendy Jansen came from Holland to work at Sappho Travel in Eressos five years ago. I ask her about the kerfuffle over the ownership of the word "lesbian". "There are homophobic people in every society," she says. "But in this place, where everyone relies on tourism, we cannot afford to ignore it." If there is negativity towards lesbians, says Jansen, it is from visiting Greeks, not the islanders.

"In this village, people are so used to lesbians that if the returning tourists come on holiday with a different partner, the locals notice. And if a couple [enter into a civil partnership], and come here on their honeymoon, locals often send champagne or flowers to them." One tourist, from London, tells me that when she split up with her girlfriend, whom she had been on holiday to the village with the year before, some of the islanders refused to speak to her when she turned up with a new woman. "They thought I was cheating on my ex," she laughs.

"At the end of the day, this is a Greek village," says Jansen, "not a lesbian one. It has not been 'invaded', or taken over. More than anything, it is cosmopolitan."

That may be true, but the place has "lesbian" running through it like a stick of rock. At the Eressos women's festival this September, organised by Jansen, events will range from the mother earth (holistic healing and dance-based meditation) to the cutting edge (drag king workshops and music sessions by DJ Miss Thunderpussy). The very different styles of event sit comfortably, side by side, just like the locals and the lesbians. In Sappho Travel, Jansen is laughing about last year's festival. The mayor, she says, came to the opening on the beach. He was the only man and surrounded by hundreds of lesbians, "some with loads of piercings, tattoos, and kissing each other. But the mayor took it in his stride and made us realise that the locals have become educated about gay issues, simply by living among lesbians." It is ironic that, bearing in mind the popular image of the Greek male - all moustache and machismo - that these villagers have accepted the women, despite the odd bit of tension and complaint.

As for our right to the label "lesbian" being challenged in the courts, no one I spoke to took it seriously. The current mayor of Lesbos has said publicly that he does not support Lambrou's case. One local woman has suggested that, if Lesbos gained independence from Greece, we could all move to the island and apply for Lesbian passports. Perhaps it's time that Lambrou got a little Lesbian pride.

· This article was amended on Friday May 16 2008. Sasha Roseneil was not a founder, nor a member, of the direct action group Lesbian Avengers as we said in an article headed Sun, sea and Sappho. This has been corrected.