The outskirts offer no hint that this is one of the most gay-friendly small towns in America. “End Times are here. Where will you spend eternity?” asks a roadside sign, just before a right turn that leads to a Christian outlet store and a 67ft statue of Jesus Christ. The national headquarters of a Ku Klux Klan group is 50 miles away.

But Eureka Springs, a pretty Victorian spa town of 2,000 nestled in the Ozark mountains, has for decades promoted an atmosphere of tolerance and inclusiveness that has made it a haven for the LGBT community. When Arkansas politicians introduced an act banning local anti-discrimination laws, tiny Eureka defied the state legislature and took a stand against bigotry by passing a civil rights ordinance that saw long-simmering tensions in the town froth up and spill over.

Senate Bill 202, proposed by two lawmakers based an hour’s drive from Eureka, stops Arkansas cities from creating ordinances that outlaw discrimination. It passed in February and becomes law in the summer. Formally known as the “Intrastate Commerce Improvement Act”, it purportedly exists to help businesses by making non-discrimination rules uniform across the state.

But Arkansas does not have a law banning anti-gay discrimination, so the effect of SB202 is to erode the rights of gay people in places such as Eureka that want to protect them.

The state’s LGBT community absorbed another blow on Thursday. Amid a national furore that prompted the original proposals to be revised after critics said they would legally protect anti-gay discrimination, the Republican-dominated Arkansas legislature approved a “religious freedom” bill that does not give specific protections against unfair treatment based on sexual orientation.

Also passed in the Arkansas legislature last week: Senate Bill 939, the “Ten Commandments Monument Display Act”, which allows a privately funded display of the edicts to be erected on the state capitol’s grounds.

Against this backdrop, Eureka held one of its thrice-annual Diversity festivals this weekend; this year, it happened to coincide with Easter. Christian groups reserved the downtown’s park and bandstand for a Celebrate Jesus concert and parade while shops hung rainbow pennants in their windows and prepared for the traditional Public Display of Affection kissing celebration at noon on Saturday.

A mile away, arms outstretched, the Christ of the Ozarks looked impassively down over the town, from the sprawling campus of the Great Passion Play. The giant mortar statue was built in 1967 by Gerald LK Smith, a politician, clergyman and white supremacist who is buried just to Jesus’s left.

The monument is one of the highlights of a religious theme park that for six months of the year hosts an epic theatrical re-enactment of the events around Jesus’s crucifixion. More than seven million people have watched a performance since the 4,100-seat amphitheatre opened in 1968, according to organisers. But as Eureka Springs became an increasingly popular gay destination, crowds fell to the extent that in 2012, the Passion Play closed due to lack of funds.

It was resurrected by Randall Christy, an Oklahoma-based Baptist pastor and the founder of a Christian radio network.

“Randall Christy told me the attendance at the Great Passion Play is what it is because church groups have decided that they can boycott homosexuality by not coming to Eureka Springs,” said pastor Phil Wilson of First Christian Church, which is on Passion Play Road, a short drive from the theatre.

“There have been many things that have happened in Eureka Springs that have made us be perceived as an eminently desirable homosexual destination,” he said. “We have 6,000 years of Judeo-Christian history that has affirmed that homosexuality is morally wrong and we live in a society that says it’s morally right.”

Asked if he truly believed that Christians in the US were under threat of oppression and needed laws to protect them, he referenced the Islamist terror attack that killed 147 people in Kenya on Thursday.

“It’s on Fox News continually in the last day or two,” he said. “I see persecutions.”

‘A handful of homosexual activists’

They’re Coming to Your Town: ‘Learn how to fight a well-organised gay agenda.’

Wilson was one of the stars of They’re Coming To Your Town, a teaching DVD produced by a fundamentalist Christian group, the American Family Association, which offers “a look at how a handful of homosexual activists infiltrated the Eureka Springs, Arkansas, government and changed the very moral fibre of the city”.

In 2007, he mobilised support for a failed attempt to fight an ordinance giving the city the right to create a domestic partnership registry that allows non-heterosexual couples to make their relationships a matter of public record.

Currently, he is worried about toilets.

“Any person can have unlimited access to any private areas of our city – that is, a man can enter a women’s bathroom by saying ‘I am a transsexual’,” he said. “Presumably I could perceive myself to be a female on Tuesday and Thursday and a male on Mondays, Wednesdays and Fridays.”

Wilson is at the forefront of the backlash against Ordinance 2223, a non-discrimination measure passed unanimously by the Eureka Springs city council in February as a riposte to Senate Bill 202. Among its equality provisions is the prohibition of unfair treatment based on “gender identity” and “gender expression”, which Wilson fears will make Eureka Springs a cross-dressing, restroom-lurking sexual predator’s paradise.

Opponents gathered petition signatures and successfully pressured the city into holding a special election on the issue on 12 May. Though the ordinance seems likely to be upheld given Eureka’s large proportion of gay residents, last December an equal rights ordinance was repealed in nearby Fayetteville.

Josh Clark, 35, is co-owner of the Green Gourd, a gift shop in the town centre which has a large rainbow flag fluttering outside. He moved to Eureka with his partner from Jonesboro, near Memphis, in search of more gay-friendly surroundings.

“Some Christians here feel that this town has gone straight to hell,” he said. “[So-called religious freedom bills are] a concerted effort to enshrine discrimination within the law; that’s what we’re dealing with here. Our lives are in the middle of this.”

‘We need to talk in terms of Christian extremists,’ says Eureka Springs alderman Bob Thomas, of opponents of the town’s tolerant attitude. ‘There are a lot of good Christians.’ Photograph: Tom Dart

But he believes that highly conservative Christians are such a small minority among residents within the city limits that their views have little impact and will not ruin the all-inclusive, all-equal ethos of Eureka Springs.

“One of the things that’s unique about Eureka is that since we’re such a tourist destination we pull in people from across the country and across the world,” he said. “We have a very sophisticated culture here, one of art and vibrancy, and so you do tend to get a more liberal, a more educated view coming from the population.”

“When you talk about the people that are opposed to the ordinance we need to be talking in terms of Christian extremists,” said Bob Thomas, one of the aldermen who voted for 2223. “There are a lot of good Christians.”

Thomas was wearing a Hawaiian shirt and sitting in Aquarius, a taqueria that, like many other businesses here, prominently displays a pro-ordinance poster.

“They’ve kicked the [gay-sympathising] Methodists out of their parade. That’s pretty extreme if you’re having a Jesus weekend. I don’t think they’re oppressed anywhere. What they want is the freedom to oppress other people.”

‘We’re the most diverse community in all of Arkansas’

Shop owner Josh Clark on gay-friendly downtown Eureka Springs.

From the beer garden of the Eureka Live Underground bar, Carly James, who said she worked as a “barista-auctioneer”, expressed concern that perceptions of Arkansas as gay-hostile in the wake of the religious freedom bill would harm Eureka’s reputation.

“I think we’re the most diverse community in all of Arkansas and it’s really upsetting that we have to be part of what the state’s doing,” the 39-year-old said. “That’s why we all live here – because we don’t feel that way.”

The first same-sex marriage license in Arkansas was issued in Eureka Springs last May, before the state supreme court put the practice on hold. The bar’s co-owner, Walter Burrell, said he was “ashamed” of the politicians.

“It’s not Arkansas values and it’s certainly not Eureka Springs values,” he said. “Before all this, nobody cared if you handled snakes as long as you didn’t hand one to them.”

Bob Thomas said that one motivation behind the rapid introduction of the ordinance in February was to get it on the books before the statewide law took effect, in the hope it will boost the city’s case if, as seems possible, the question of whether it can be enforced ends up in court.

The 68-year-old former teacher adopted two sons as a gay single parent living in Alaska, where he said that in some ways the lower level of political interference made it easier to be gay.

“Arkansas was sort of a ‘don’t ask, don’t tell’ state,” he said. Now, he said, “down here people are not that willing to let their neighbours live their own lives.”