When I was researching my book about his family, Baron "Heini" Thyssen-Bornemisza, self-styled "Swiss" industrialist and legendary art collector, always insisted that Margit, his vivacious older sister, was in fact shy and retiring, while his family's castle at Rechnitz had been entirely destroyed by the Russians during the war.

I first suspected he may have been lying when Josi Groh, his Hungarian lawyer, told me that far from being shy and retiring Margit had a "voracious sexual appetite" and that she had remained in residence at the Thyssens' castle throughout the war, enjoying the attention of the SS officers sent there for rest and recreation. But it was his insistence that the castle, or what remained of it, hid a terrible secret that encouraged me to visit Rechnitz.

In this quiet castle town in the foothills of the Alps, I learnt that in the last days of the Second World War, Margit hosted a party for SS officers, Gestapo leaders and local collaborators during which 200 Jews were slaughtered, as entertainment. Ever since, the Thyssens have not accepted involvement and have played down their Nazi past. '

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The story begins with Heini's German father, Heinrich, heir to one of the world's largest industrial fortunes. Having profited from the First World War, but lacking an "appropriate" social position, he acquired Hungarian nationality and the dubious title of baron. To complete his reinvention as a Hungarian aristocrat, Baron Heinrich Thyssen-Bornemisza de Kaszon bought himself a castle at Rechnitz, 150km south of Vienna, on the Austro-Hungarian border. But in 1938, when it became obvious that another war was looming, the "Baron" transferred ownership of the castle to his daughter and slipped across the border to the safety of Switzerland.

From Villa Favorita on the shores of Lake Lugano, Heinrich controlled his German mines and factories throughout the war; supplying the Third Reich with coal, steel and U-boats. He also provided his close friend Hermann Goering and the Nazi secret service with international banking facilities, while in 1941 his August Thyssen Bank in Berlin contributed 400,000 Reichmarks towards the upkeep of the castle, which had by then been requisitioned by the SS.

Meanwhile Margit remained at the castle, where she was provided with a generous allowance from Thyssengas, one of her father's German companies. A Thyssengas employee and Nazi Party member, Joachim Oldenburg, was seconded to assist in managing the estate. Locals employed at Rechnitz report that the "young, dashing and virile" Oldenburg quickly accepted responsibility for accompanying Margit on hunting trips – and was soon sharing her bed.

This despite the fact that, in 1933, Margit had enhanced her social position by marrying the impoverished Count Ivan Batthyany, whose family had originally owned the town of Rechnitz and a large slice of Hungary. In a bizarre arrangement, while "the countess" shared the castle with her SS guests and her bed with Joachim Oldenburg, her estranged husband continued to enjoy his wife's money and breed horses on one of the Batthyanys' adjoining Hungarian estates.

Further complicating her domestic arrangements, Margit was also enjoying a dalliance with the sexually ambitious Franz Podezin, a Gestapo administrator and leader of the Rechnitz Nazi Party.

But SS officers were not Margit's only guests at Rechnitz. At the end of 1944, 10,000 Hungarian Jews and gypsies had joined the 100,000 forced labourers building fortifications along the Austro-Hungarian border, which were designed to stop the advancing Red Army. During the 200km westward march from Budapest they were subjected to atrocities at the hands of their guards while local inhabitants felt free to shoot at them as they passed by – thousands died.

Six hundred Jews, assigned to strengthen the Rechnitz defences, were housed in the cellars of the castle, living in appalling conditions. Many were arbitrarily beaten and shot, particularly by Podezin, while local people reported the countess derived obvious sadistic pleasure from observing these barbaric acts: "She always stood right at the front when anything like that was going on," said one witness.

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By the spring of 1945, it had become obvious that it was only a matter of time before the advancing Russians would overrun the area but Margit appeared determined to remain at the castle until the last possible minute.

Finally, with the Red Army only 15km away, the countess hosted a party at the castle on the 24 March, the eve of Palm Sunday, inviting up to 40 people including leading Nazi Party, SS, Gestapo and Hitler Youth members. The party started at 9pm and lasted until dawn, with a great deal of drinking and dancing. But traditional party entertainment was not enough, and at around midnight some 200 half-starved Jews, pronounced unfit for further work, were delivered by lorry to "Kreuzstadel", a barn within walking distance of the castle. Podezin then ushered Margit and 15 of the more senior guests to a store room, gave them weapons and ammunition and invited them to "kill some Jews".

The prisoners were then forced to strip naked before being shot by drunken guests, who returned to the castle to continue to drink and dance until dawn. The following morning, they were heard bragging about the previous night's atrocity: one Stefan Beiglboeck even claiming that he had "slain" six or seven Jews with his own hands.

The bodies of the victims were buried by 15 of the prisoners saved for the purpose. The burial party were kept in the local abattoir before being shot the following evening by Oldenburg and Podezin.

Many years later, Heini admitted his family's industrial and financial support of Hitler and the Third Reich, but he avoided providing any details concerning the Rechnitz massacre.

But within hours of arriving at Rechnitz, my research partner Caroline Schmitz and I had been quizzed by the local innkeeper as to why we were there. He introduced us to sons of the castle's wartime staff and to a retired teacher and the town's official historian, Doctor Josef Hotwagner – a charming man whose ill health does nothing to diminish his wit or his academic skills. Known locally as "the Professor", he is regarded with affection in the town, despite the occasional accusation of being a trouble maker. But Hotwagner has a better reason than most for remaining determined that the Rechnitz massacre should never be forgotten.

The people who committed the barbaric execution were the same people who, in 1941, effectively killed his father by charging him with high treason and sentencing him to 10 years' hard labour at Dachau. Hotwagner senior had been among a small group of townspeople discovered to be supporting the starving women and children left behind when their persecuted men-folk had been shot or forced into slave labour. Dachau was liberated by the Americans in 1945, but Hotwagner's father died in hospital before he was able to return to his family. Josef still displays obvious emotion when recalling the terrible story of both his father and his town.

He remembers the terrible dilemma at eight years of age of he and his mother being forced to leave his grandparents as the battle front drew closer, fleeing into the countryside to take shelter in a wine cellar.

But when the Russian attack finally took place during the night of 29 March 1945, the Red Army, facing very little opposition, soon overran the town and the surrounding vineyards. After being shot at by a drunken Russian soldier, Josef and his mother decided to return to the town, where more sober soldiers shook their hands in greeting. But the castle was already alight, and he remembered "the sky was blood red from the flames for three whole days". Although the Russians were blamed for setting it alight, Hotwagner and many of the townspeople believe it was the German forces who torched it, in compliance with Hitler's "Nero Command", or scorched earth policy.

After a brief counterattack by the SS and the loss of more than 1,000 lives, the Germans eventually admitted defeat, leaving the Russians to occupy Rechnitz and Eastern Austria for the next 10 years.

According to Hotwagner, the victorious Russians soon discovered that, 12 days earlier, a large number of Jews had been murdered, and following further investigation issued a protocol which read: "We, the undersigned have written down the following in order to bear witness of the Fascists' bestiality. On 5th April, a number of graves were excavated, where Jews were buried who had been killed in a bestial manner. In all, 21 graves were found, each one being 4m to 5m long and 1m wide. Each grave contains 10 to 12 people, victims of shots in the neck using firearms or machine ' pistols. The murdered people were very emaciated. An examination of their bodies revealed many bloodshot and blue areas on their skins. Apparently, they had been hit with sticks and rubber clubs prior to being shot. The inhabitants say that on 24 March these people had to dig their own graves and were shot immediately afterwards."

This protocol was published on 12 April 1945 in the Soviet national newspaper, The Red Star, but was subsequently dismissed as propaganda by many Austrians. During the resulting legal proceedings which took place in 1946 before the "people's court", the graves were again opened and an exact location plan was compiled and placed with the Austrian District Court in Oberwart. However, shortly afterwards this plan disappeared. It was only the first of a number of such conspiratorial occurrences.

In the years 1946 to 48, several further legal proceedings took place. But in 1946 the two main witnesses were murdered and one also had his house burnt down to destroy any incriminating evidence. Fear spread, and as a result, most of the witnesses revoked their testimonials during the main proceedings, or toned them down, or failed to appear at court. The few sentences that were awarded to those who hadn't already fled were very lenient and after a few years they were freed on appeal.

The court also uncovered evidence that suggested further murderous acts had been committed in Rechnitz. This was supported by one Paul Szomogyi, who said in his witness statement that on 26 March 1945, 400 Jews from his group of forced labourers had also been killed in a similar fashion. But due to intimidation, he failed to appear in front of the court, which claimed his testimonial could not be investigated any further.

Margit, along with Podezin and Oldenburg, also avoided prosecution, having fled Rechnitz ahead of the advancing Russians and escaped to Switzerland where, having facilitated the latter's return to Germany, Margit housed Podezin in a small apartment above a bar in Lugano, from where he continued to fulfil his role as her lover. But eventually, Podezin's presence became embarrassing and he was forced to leave. Under threat from the criminal proceedings, he demanded financial assistance from Oldenburg and Margit to enable him to escape to South Africa, threatening to "drag Oldenburg and the countess through the mud" if ignored. Funds were forthcoming and Podezin was last seen in Pretoria, while Oldenburg fled to Argentina.

It was not until 1987 that the Refugius (Rechnitz Refugee and Commemorative Initiative and Foundation) was founded and began to organise the erection of a monument to commemorate the massacre. The association also bought the land on which the Kreuzstadel stood, presenting it to the Vienna-based Israelitische Kultusgemeinde organisation. Every year a small commemorative service takes place at the site, although only one of the victims, Laszlo Blum, has ever been identified.

In the local park, a memorial to four murdered resistance fighters, including Dr Josef Hotwagner senior and the "200 Jewish forced labourers from Hungary, who were murdered on 24 March 1945", was finally unveiled – on the opposite side of the park to the monument honouring the names, and photographs, of the 177 local soldiers who lost their lives in the war, fighting for the Reich.

The atmosphere during the unveiling of the memorial to the Jews and members of the resistance was overshadowed by the knowledge that a meeting of the Rechnitz Comrade Club, whose leader was Tobias Portschy, ex-SS, Wehrmacht member and Nazi Gauleiter, was to take place on the local Geschriebenstein mountain the following day. This was not to commemorate the liberation of Austria from the Nazis, but the noble defence of the homeland by the Wehrmacht.

Tobias Portschy died of natural causes in 1996 but a disturbing number of local people still share his beliefs. As recently as 1985 the journalist who wrote a series of articles in the Austrian newspaper Oberwarter Zeitung on the murders under the headlines, "The Rechnitz Murder", "Orgy Ball" and "Dance Macabre" decided to curtail the series after his life was threatened. Meanwhile, a recording of an old woman's eye-witness report, sent to the Austrian television channel ORF by Josef Hotwagner, was permanently "mislaid".

According to local legend, the landlady of the local Gasthaus Rose and widow of Tobias Portschy believed that trying to locate the exact burial site, so that the remains of the victims could be reburied in a Jewish cemetery, was completely unnecessary. She is quoted as saying: "Don't look for the Jews' bones. Look for the gold that they buried."

She and her husband also openly expressed their hatred of gypsies, and a number of the townspeople appreciated the irony when, many years later, they accepted money for housing refugee gypsies in their hotel.

While reactions to the memory of the terrible atrocity remain mixed, there are few members of the community who forgive the Thyssens for failing to repair the castle which had, since the 13th century, been both their town's soul and the reason for its existence. Instead, the remaining building suffered the ignominy of being converted into apartments and the Thyssens' private chapel into a bar.

When the Russian occupation ended, Margit arrogantly returned to Rechnitz as a guest at the Batthyanys' newly built hunting lodge, shooting deer and wild boar in the surrounding forests. Otherwise, she occupied herself by breeding horses at the Thyssens' Erlenhof stud farm, near Bad Homburg in Germany. The original owner of Erlenhof, the Jewish paper manufacturer Moritz James Oppenheimer, was arrested by the Nazis in 1933 and forced to sign a declaration of bankruptcy prior to his death, which the authorities claimed to have been the result of his suicide. Heinrich then bought the stud from the liquidators for a fraction of its true value before leaving it to Heini. He then leased it to his sister who successfully rejected all post-war claims for restitution.

Without ever being implicated in the atrocity, Ivan and Margit died of old age in 1985 and 1989 respectively. But the Count Batthyany of Güssing, near Rechnitz, appeared to be unwilling to permit their burial in the family crypt at their Franciscan chapel, despite or because of the fact that Count Ivan's father, Count Ladislaus Batthyany, eye surgeon and benefactor, was in the process of being beatified; the third stage of the sainthood process that had started in 1944 and was finally carried out by Pope John Paul II in 2003.

What is remarkable about Margit's complicity in the Rechnitz massacre, is the fact that Germany, despite claims to the contrary, still suffers from a selective memory: only publishing carefully edited versions of the history of the Thyssens, which avoid reference to the family's anti-Semitism.

In 2003, an authorised history of the Thyssens, Fritz Thyssen – Hitler's Benefactor and Hostage was published in Germany, which quoted from a letter illustrating Fritz Thyssen's (Heinrich's brother) refusal to do business with Jewish industrialists, because of their criminal record rather than his anti-Semitic views, which are contained in the same letter. None of the previously published histories of the Thyssens, either social or industrial, in books or periodicals, have mentioned the Rechnitz story or the full extent of the family's involvement with the Third Reich.

The fact that ThyssenKrupp AG refused to grant me access to its archives during my research, and 23 prominent German publishers rejected The Thyssen Art Macabre prior to its UK publication, may not immediately signify a cover-up, but when, at the last minute the Bertelsmann-owned Spanish publisher demanded that I remove all references to the Nazis before they would publish, it was difficult not to suspect a degree of conspiracy. Having been published in the UK by Quartet, The Thyssen Art Macabre will now be published in Spain, home of the Thyssen-Bornemisza art collection, by Temas de Hoy, a Spanish-owned publisher who made no such demands. Meanwhile, German publishers still appear to ignore the book. *

'The Thyssen Art Macabre' is published by Quartet Books