Every graveyard tells a story. The Maple Grove Cemetery in New York is no exception. Its tombs mirror the waves of immigration to this bustling corner of the city. Inscriptions on older stones, flecked with moss, are mostly Jewish or English. The newer ones, shiny and polished, bear Chinese names, or Indian, or Hispanic. Each grave is a full stop on an individual life: a point of final departure and no return. Except for one.

On a chilly winter's day last November a team of gravediggers plunged their spades into the cold earth above Esfir Perelmuter and began to bring her back into the light. When they prised open Perelmuter's pine coffin what they saw within sent shockwaves across America. The body of the 82-year-old grandmother had been desecrated. She had been surgically carved up and was missing nearly every bone below the waist. In their place were plastic pipes. Cloth had been used to replace missing tissue. Then she had been sewn up again.

For the detectives supervising Perelmuter's exhumation the discovery only confirmed what they already knew: there was a body-snatching ring working in the heart of New York City. Criminals had been 'harvesting' bones, skin and ligaments from the dead and selling them on the medical market for donated tissue. It is a lucrative industry. A corpse, by some estimates, can net between $100,000 and $250,000.

New York's body snatchers had been busy, too. Police estimate more than 1,000 corpses fell under their knives in what one detective called 'a human chop shop'. Amazingly, one of the corpses was that of Alistair Cooke, the renowned BBC broadcaster whose Letter from America was a weekly radio essay that shaped British views of the US for half a century.

New York is not a city easily shocked. But the discovery of a latter-day Burke and Hare in the middle of the Big Apple did the trick. It seemed like a horror film come to life. 'This was no bad movie. This was the real thing,' says Brooklyn district attorney Charles Hynes. Across New York graves were dug up, relatives mourned anew and tabloids raced to print the lurid details. In a world where death and dying is all too sanitised, the body snatchers brought the dead back into public life. They had left a city - and a nation - pondering its attitudes to death and shattered taboos long left untouched. Most of all, America wanted to know how this could have happened in New York in the 21st century. Cooke's daughter, Susan Cooke Kittredge, felt the shock first-hand: 'No one was minding the store and it turned into a little shop of horrors.'

The first sign that something was wrong came when Deborah Johnson, the manager of the Daniel George funeral parlour in Brooklyn, complained to the police that a previous owner had defrauded a client seeking to bury his aunt. Johnson claimed that Joseph Nicelli had taken pre-payment for the funeral and then sold the business to her before the ceremony. Johnson was furious and lodged a complaint with police in November 2004.

Detective Patricia O'Brien was assigned the case and casually walked the short distance from the 62nd Street Precinct police station to Bath Avenue in Brooklyn, just a few blocks from the sea. Johnson ushered O'Brien inside the funeral home and showed her reams of financial documents. Then she whispered that there was something unusual about the building. O'Brien, a petite blonde making her way in the NYPD as a detective, was shown a secret room that seemed more equipped for surgery than for embalming. It was equipped with bright lights like an operating theatre and had a trap door in the floor from which bodies could be hoisted from the room below by a mechanical lift. Puzzled, O'Brien pored over Nicelli's old records; she discovered company names she had never heard of. Back at her desk she entered the names on to the internet. Each one was involved in tissue transplants.

The Daniel George funeral parlour is empty now. Traffic whizzes by oblivious to what once occurred there. The name on its red awning has been torn out, the doors are locked; inside, dust gathers on floral sofas that once seated grieving relatives. But what Nicelli and his partner, Michael Mastromarino, did inside 1,852 Bath Avenue is now detailed in an enormous police indictment containing 122 charges. The two men, and two other associates, Lee Crucetta and Chris Aldorasi, have pleaded innocent so far. But the police documents read like a roll call of horror. According to the police, the body snatchers treated the dead passing through the funeral home like farmers reaping a crop. They took what they could sell, covered their tracks with fake documents and then watched as the mourning families buried the evidence.

Nicelli ran the funeral home and had contracts with others in New York, Rochester, New Jersey and Philadelphia. Bodies would arrive to be embalmed and then, behind closed doors, they would be hoisted up through the ceiling and into the secret cutting room. There the former dental surgeon Mastromarino, aided by his 'cutters', Crucetta and Aldorasi, would knife them open and remove what could be sold. The parts would be traded on the market via Mastromarino's company, Biomedical Tissue Services. The missing bones were replaced by PVC pipes and the empty space where tissues had been removed was stuffed with surgical gloves and cloth. The bodies would then be sewn up and delivered back to the families. The cause of death and the age of the dead would often be faked to make the tissues more marketable. Corpses riddled with cancer would have the cause of death listed as 'heart disease'. Decades would be knocked off a person's life. One 104-year-old was listed as having died at 70. Esfir Perelmuter was listed as 65, not 82, when she passed away. Her cause of death was logged as heart disease, not the brain cancer that had actually taken her life. It was the same for Alistair Cooke. He had died of lung cancer that had spread to his bones, and was 95 years old. Yet his tissue was sold on as that of an 85-year-old man who had died of a heart attack.

There was good money to be made. Police believe Mastromarino and Nicelli ran the ring for almost four years and netted around $4.7m. They certainly lived large, becoming pillars of their local communities. Both were family men with an aura of respectability. Nicelli lived in a handsome three-storey house on Staten Island. Mastromarino bought a $1.5m home in plush Fort Lee, just over the Hudson river from Manhattan's Upper West Side.

Yet they had entered the death industry by different routes. Nicelli's parents ran a funeral business in Brooklyn. His first wife, Meg Dunn, was the daughter of a well-known local funeral director. Mastromarino was a relative latecomer. He had been a star football player at the University of Pittsburgh until an ankle injury ended his professional prospects. He studied dentistry and carved out a successful practice just off Fifth Avenue, where glamorous Gothamites paid a fortune to keep their pearly whites sparkling. He even co-wrote a book called Smile: How Dental Implants Can Transform Your Life.

But behind both men lay troubled lives. Nicelli had waged a long battle with debt; for a decade he had struggled to pay his taxes. Mastromarino's fight was with drugs. He used painkillers and cocaine and attracted a raft of malpractice suits. Several alleged he passed out while his patients were under anaesthetic. He spent time in rehab and in 2000 he lost his dental licence because of his drug problems. But by then, it appears, Mastromarino had uncovered a new way of making money: selling body parts. He founded Biomedical Tissue Services (BTS) and embarked on a new career supplying bones and tissue to the transplant market. It is a perfectly legal trade, enabling tens of thousands of vital operations to take place every year. But at some stage - police believe in early 2001 - BTS started selling bone and tissue that was old or potentially diseased.

By the time O'Brien visited the Daniel George funeral parlour the police believe the body snatchers had become careless. Besides leaving Nicelli's unpaid debts behind they had continued to plunder corpses at Daniel George for body parts. Police allege the four men kept copies of keys to the property and would sneak inside to use the secret operating room when the new owners weren't there.

With O'Brien now on the case the body-snatching ring's days were numbered. Two top detectives from the NYPD's Major Case Squad were assigned to help. They began interviewing relatives, comparing medical notes and tracing consent forms. Eventually, towards the end of last year, they began to open graves.

The body snatchers were now being exposed elsewhere, too. This time it was not in New York, but nearly 2,000 miles away, in Denver. It was late on 23 September 2005, and Dr Michael Bauer had been checking paperwork on a batch of 30 tissues from BTS. He was comforted that all of them gave phone numbers for both the family doctors and the next of kin of the deceased. 'That is usually a sign of great care,' he says. Then he noticed a minor medical problem with one donor. 'It was something a quick doctor-to-doctor chat would have sorted out. So I called the number on the form.'

The number was wrong. So wrong, in fact, that Bauer became concerned. He tried two more doctors' numbers on other samples. They were wrong, too. He tried eight more. Also wrong. Then he tried the next of kin numbers. Wrong again. He got disconnected calls, random businesses, unrelated home numbers and fax machines: never the real numbers for doctors and relatives. It was the same on all 30 tissues. 'I still thought that there had to be a reasonable explanation,' he says, 'but I knew that until we heard that reasonable explanation we had to halt all BTS supplies and recall any BTS tissues.' The recall order went out the next day. Bauer's hope for a 'reasonable explanation' turned into a nightmare. 'These people were renegades,' he says.

Arrest warrants were issued, and on 22 February at 10pm, Mastromarino walked into the District Attorney's office on Jay Street in Brooklyn and turned himself in. Crucetta and Aldorasi also handed themselves over that night. Nicelli came in a little later.

But it is not yet over for the victims. Michael Bruno was a typical New York cabbie. An Italian, he loved to talk and vent his opinions with his passengers. 'He was a guy straight out of the movies,' says his son, Vito. Michael Bruno died aged 75 in Brooklyn after a battle with kidney cancer. His family buried him in 2004. They mourned their loss and got on with their lives, until one morning a detective came knocking and asked Vito if a signature on a donation consent form was his. 'It was not even remotely like mine,' says Vito. 'I was just shocked. You never believe you could have fallen victim to something like this.'

It was a shock to Wendy Kogut, too. Her sister Danette, 43, had been a Merrill Lynch executive assistant until she succumbed to ovarian cancer. She fought a brave but losing battle against the disease for two years, and was buried in 2003. The police also came knocking at Wendy's door. The signature on Danette's donor family consent form was their grandfather's name. He had been dead for 30 years. 'I feel like somebody took my sister and violated her. You relive the death all over again,' Wendy says.

Those are just two stories among 1,077. Each corpse was a human being, whose life was as full as any other. Each had mourners and family. Each had been carved up and sold like so much dead meat. It is no wonder the psychological trauma inflicted by the body-snatching case has been so extreme. It was especially bad for the Kogut family. Danette had planned her funeral meticulously and insisted that she did not want anyone to touch or view her body after she died. It was her wish to be cremated immediately. Instead, she fell prey to the body snatchers. 'She said, "I am dying and I want privacy in my death,"' Wendy recalls. 'Now she will not be remembered for what she did with her life; she will be remembered for something that happened to her after she died.'

So horrific were the crimes that relatives of the dead have felt marked out. Vito says that everyone in his Brooklyn neighbourhood knows about the case. It feels like a shadow hanging over his family: 'People don't know how to react to such a thing. I walked by a school the other day and a little kid shied away from me.'

The roster of victims revealed the body snatchers harvested from all walks of life, all ages and both sexes. Perhaps they knew the frail old man they cut up in March 2004 was Alistair Cooke, one of the most distinguished British broadcasters of the last century. Or perhaps they knew him as the genteel presenter of Masterpiece Theatre, an American TV show that brought Cooke fame in his adopted home. Perhaps they did not. Either way, death was the ultimate leveller and Cooke was treated no differently than Michael Bruno or Wendy Kogut before him. His daughter, Susan, found out the same way: a call from the police. 'I have been living with this for three months now. No one wants a cold, icy grip coming back from the grave,' she says.

Yet perhaps the greatest horror was reserved not for the desecrated dead, nor even their stunned relatives, but for the living who received the harvested tissue. They carry pieces of the dead inside them from people who had no idea their bodies were to be reused. 'My father wanted to be cremated,' says Vito. 'For bits of him still to be walking around is pretty unbelievable.'

But across America, Canada and perhaps elsewhere this is exactly what has happened. BTS fed its tissue supplies into a huge industry with a seemingly inexhaustible demand for new material, and its tissue was mislabelled, and untested for disease. Medical experts have recommended that anyone who received tissue from BTS be tested for HIV, Hepatitis C and syphilis. Though cancer is not transferable, cancerous bones are often too weak to be used safely in transplants. The same goes for elderly tissue: there is little point in using fresh bone harvested from someone already 100 years old.

There are hundreds, if not thousands, of potential victims, stretching across America. Lori Sarrazine, 35, who lives in Fort Wayne, Indiana, is one of them. After a car accident had accentuated a degenerative disease in her neck, she underwent an operation. A doctor fused three of her neck vertebrae together using a metal plate, metal screws and a 'cadaver bone'. The bone was from BTS.

Sarrazine has now been screened for disease and has so far tested negative. But diseases such as HIV have long latency periods. She cannot sleep at nights and the stress has caused her to fall ill with a stomach ulcer. She knows that in her neck is a bone stolen from a corpse.'I would say to the people who did this - let's change places. Let them have my place. What they have done to me is shocking.'

Looting corpses for body parts is indeed shocking in modern America. But trading in human tissues is not. If nothing else, the body-snatchers' case has cast some light on a little-known area of medical science, but one that is becoming ever more commonplace: human recycling.

It is a long way from the clandestine body trade of the 19th century, when grave robbers pulled corpses from the ground to sell to medical professors. Now, tissue transplanting is a vital part of modern medicine and one that gives hope and health to millions. The popular image of the life-saving swap of a major organ such as a heart, lung or liver is a tiny fraction of the industry - it has grown to include bone, skin tissue, muscles, tendons and ligaments. Screws and plates once fashioned out of metal are now sometimes carved from bone. Human tissues are used in skin grafts for burns victims, knee and elbow injuries, cosmetic surgeries, neck and back repairs, dental improvements. The list is virtually endless and the industry is worth about $1bn a year. About 25,000 donors annually account for 750,000 transplant procedures. Tissues are harvested from hospitals, funeral homes and coroners' offices. They are generally stored frozen until required.

Nor are these implants solely for the sick and old. Sports injuries, especially tendons, are commonly cured with donated tissues. The Australian skier Alisa Camplin recently won a bronze medal at the Winter Olympics in Turin after having a patella tendon from a cadaver implanted in her right knee. In America alone there are 200 for-profit and not-for-profit tissue banks. While it is illegal to directly sell a body part for profit, there is a huge loophole. Because many of the tissues used, such as pins made from bone or skin flaps, have been altered or 'processed' in some way, firms are allowed to charge 'reasonable' fees for such treatments, as well as covering their costs for storage and salaries. Even not-for-profits have to pay their often highly trained staff decent wages.

That means a dead body has huge value - estimates suggest up to $250,000. Prices for parts vary: a lower jaw can fetch $3,000, fingers come at $15 a piece and sexual organs (used for practising new surgery techniques) generally go for $125.

Of course, many doctors worry that the body-snatching scandal will harm the image of an industry that by its very nature seems slightly ghoulish. 'We depend on public trust. Anything that threatens that public trust is serious,' says Dr David Bosch, president of the national Coalition on Donation.

The booming transplant industry is always faced with a shortage of tissue and that is likely to only get worse. As Western populations age with the looming retirement of the 'baby boomer' generation and medical advances make the elderly more fit and active, the need for transplant science is increasing. Bosch believes education is the key to getting people to better understand tissue donation: 'We need to tackle it in schools. It really is just like any other form of recycling.' But if an age is dawning where increasingly humans can be fitted with spare parts from the dead, what does that say about our attitude to our own mortality? What does it actually mean to die in America?

What the body-snatching scandal really did was shatter a modern taboo about openly dealing with death. 'We have gone through a period of death denial, where no one wants to admit that we are all going to die. We try to ignore death,' says Professor Christine Bochen, an expert on death rituals at the Nazareth College in Rochester, New York.

In the past 100 years, our way of dealing with death has undergone a radical change. At the start of the 20th century, death was a communal experience: the old died at home, watched by their families; relatives would often take part in preparing the body for burial; an entire community would mourn together. Today, we live in an era of nursing homes and anonymous funeral parlours. Death is hidden away and taken care of by others. 'We are relieved that someone else will come and take care of it. We want a quick-fix solution,' says Susan Cooke Kittredge. That is why the body snatchers were able to flourish. The system in which they worked was full of checks and balances, such as consent forms and doctors' telephone numbers - it was just that no one seemed to use them.

In the end, though, the body snatchers got it wrong. The horrified reaction to the case shows that old societal mores are still strong; even if they lie deeper beneath the surface these days. The relatives of the dead do care. They know the gravestones marked not just the last resting place of flesh and bones but are also repositories of whole lives; decades of memories, of laughter, of anger and of love. They were individuals who could still be wronged even after they had died.

Some good may now finally come out of the horror. As the body snatchers await their trial, America may finally start to face death and dying with a new openness and honesty. No one can live forever, whatever medical science wants us to believe. 'If we can start to talk about death, that would be positive,' says Cooke Kittredge. 'That would be a good thing.'

All four of the accused body snatchers protest their innocence; their day in court will come later this year. Whatever the final verdict, America will watch with baited breath and morbid fascination. Death will again be part of the national discussion. In the meantime, on the grave of Esfir Perelmuter, surrounded by all the noise and chaos of New York life, there lies a bunch of fresh flowers.