The number three bus in Riga winds from the mouth of the river Daugava, past the lovely old centre of the city to the miles of Lego-brick, Soviet-era blocks in Plavnieki.

At the foot of one of them, Natalija is sitting at one table and Maksimam at another in the Tris Pelmeni cafe, eating herring with onions and drinking beer while ice melts down the windows and the radio relays a highly charged ice-hockey game between Dinamo Riga and Ska St Petersburg. Old ladies pick through the snow with shopping, men rummage through rubbish bins and boys with shaven heads fly the Russian flag from cars screeching through the slush.

This weekend, there is also a widespread sense of anger. In this ethnic Russian suburb of the Latvian capital, there is disbelief at the prospect of a commemoration to be held this Tuesday by veterans and supporters of the Latvian Legion of the wartime SS.

Natalija's uncle "was killed by the fascists", she says, yet "still the Latvians allow a parade of the SS of Adolf Hitler!".Maksimam, younger, hunches the collar of his leather jacket, sips his drink and says he cares little what the old people get up to – but spits at the idea of an SS ceremony.

In a nod to ethnic allegiance, he is supporting St Petersburg in the ice-hockey contest against his home town. Many of his fellow ethnic Russians, who form the majority in the capital but a minority nationwide, are doing the same.

A few miles away in the city centre, rows of young Latvians greet the end of the match, a sensational 3-1 away win for Riga, at the Folk Klubs Ala, with beers and cheers for a stab at the Russian foe on his own terrain.

Here the view of Tuesday's controversial commemoration is very different. A boy called Uldis thinks "it's correct to allow those who fought for Latvia to honour the dead". The idea they were Nazis is "bullshit – they were defending our country".

Battered by recession and emerging from the harshest winter in 30 years, Riga is bitterly divided over an annual commemoration that has also become an international controversy. Ever since David Cameron pulled the Conservative party out of the centre-right coalition in the European parliament to align the Tories alongside rightwingers such as Latvia's Fatherland and Freedom, which helps organise the SS event, an unexpected spotlight has shone on this corner of eastern Europe.

The foreign secretary, David Miliband, has called such links "sickening". The Tory chairman, Eric Pickles, has accused critics of recycling "old Soviet smears" about the Latvians. And the annual SS veterans' march has become for many a disturbing symbol of rightwing extremism within the European Union.

The ramifications of the row that electrified British politics and Brussels have now been felt in Riga. Tuesday's events have been banned by the courts – citing security reasons – at the behest of the pro-Russian Harmony party which controls Riga.

The party's chairman, Janis Urbanovics, told the Observer that "although the legionnaires themselves decrease with time, the problem is increasing. After independence, this country became so preoccupied with hating Russia that it is not coming to terms with what happened during German occupation. We need that in order to draw a line under the past".

Juris Dobelis, a parliamentary deputy for the Fatherland and Freedom party, will be there in defiance of the ban. "A soldier is a soldier and all soldiers are equal," says Dobelis. The units that fought here "were young men of 19 mobilised to fight other young men 19 years old. If politicians want to make speeches about that, it's not our concern. We have seen commemorations in London and Moscow – this is ours." The Latvian Legion fought, he insists, "for the liberation of Latvia from the Soviet Union", and in support of the Wermacht "as liberators only for a moment".

Therefore, "we will go as a party", says Dobelis, a man with a manner of iron, "with veterans of 90 years old, to church at 10am. After church we go to the monument and by afternoon we shall be 70km away at the Lestana cemetery" – where the SS dead are buried.

Janis Atis Krumins's father was an SS legionnaire and he will be there, too. Krumins is a member of Daugava Vanagi – Hawk of the Daugava – founded in 1945 by 12,000 legionnaires in a British POW camp at Zedelgem in Belgium "to support the veterans and families of the dead, scattered into exile during Soviet occupation", says Krumins.

The commemoration provokes anger, Krumins says, "because whoever wins the war is considered to be in the right. Justice belongs to the victor, and the Soviet victor's history demands that legionnaires be considered war criminals, the Red Army as heroes. For the Russians, whoever fights against communism is a fascist".

Their gesture will be contested on the streets and at a conference – addressed today by the director of the Simon Wiesenthal Centre, Efraim Zuroff – run by Latvia's Anti-Fascist Committee, LAK. LAK was founded by a beekeeper named Josepf Koren, who describes himself as "not Russian but Jewish and born anti-communist" after his and his wife's families were persecuted by the Soviets.

"We don't say all veterans are war criminals," says Koren, "but at least 25% of the Latvian Legion were recruited from the Latvian police who were involved in the murder of Jews and other Latvians, and the SS Legion should not be permitted a celebration of itself in the centre of our city."

This event has become a political football in contemporary Latvia – a young country bitterly and deeply divided between ethnic Latvian and Russian communities and political parties – on all sides, even among Tuesday's mourners: "The second world war is with us today," says Mr Dobelis. "We have many senior former officers of the KGB and Red Army living in Latvia."

The country's foremost public historian, Valters Nollendorfs, has problems with both sides of the argument, defending the Legion as distinct from the Third Reich but chastising Latvian politicians "for not coming to terms with the Holocaust".

"The elite that runs this country knows that people who volunteered or were drafted by the Germans were among the murderers of the Jews." On the other hand, "you cannot take away the context of a year of Soviet occupation. When does resistance to the Soviets end and collaboration with the Nazis begin?" Successive occupations "dealt a terrible blow to Latvia's sense of being, pitting brother against brother, literally".

Arturis Punte's two grandfathers fought on opposite sides, one for the Legion, the other for the Red Army. Arturis calls himself "a Russian Latvian in Europe", and it is a relief to meet him in a bistro for which he is translating the menu into Russian. Punte is a poet, but is best known in Latvia for his Orbita project, which became the first Russian arts group to win the Latvian literary medal.

"We try to translate between the cultures, literally and figuratively," he says, "to forge an objective Latvian narrative we can all share. Both sides manufacture folklores of fake heroism based on bad history, and the ceremony of 16 March just reflects the fact that the establishment can't say clearly what happened here – everyone is always looking for someone else to be the guilty ones in the traumas that this place has been through."

In Riga, while the rest of Europe debates the danger of far-right extremism in the present, and the likes of Juris Dobelis commemorate a dubious past, the increasingly urgent priority is reconciliation.