In the centre of Budapest yesterday, the number 26 stood picked out in big red letters above the magnificent blue and gold Art Nouveau facade of the city's renowned New Theatre, where Schiller's Don Carlos is on its final run.

The number is the liberals' last stand.

It tells passers-by just how many days the New Theatre's leftist director, Istvan Marta, has left before he is forcibly evicted on the orders of Hungary's new conservative nationalist government. He is to be replaced by a dramatist notorious for his anti-Semitic views and an actor who recently campaigned for Hungary's neo-fascist Jobbik party.

There are hard times indeed for those in Hungary who like to think of themselves as enlightened, liberal, or even remotely left-wing. Yesterday, the concierge at the New Theatre stepped outside into the blustery cold of mid-morning Budapest. "We've only got 26 days left. Then it's all over for us," he explained ruefully. "We are – how do you say – under new management. It's happening all over Hungary and there's nothing we can do."

It is a sign of the times: in just over three weeks, Budapest's New Theatre will start a new season with more patriotic Hungarian plays very different from classics like Don Carlos.

Hungary's right-wing populist government hit the headlines this week over its plans to impose draconian controls on the Hungarian central bank. The decision led Budapest to fall foul of the International Monetary Fund and caused the collapse of the forint against the euro. Yesterday, the Fitch ratings agency further downgraded the country's debt to junk status.

Hungary has recently signalled its readiness to back down and reach a deal with the IMF. But bank controls are only a small part of the problem; 22 years after the collapse of its comparatively benevolent system of totalitarian socialist rule under a regime once jokingly referred to as "goulash communist", Hungary has swung violently and alarmingly in the opposite direction.

The nationalist Fidesz government of Viktor Orban is not merely interested in wielding greater control over financial institutions. It has embarked on a Kulturkampf – a cultural revolution – which seems bent on imposing its right-wing and xenophobic ideology on all walks of life, ranging from minorities and religions to the media, judiciary and arts.

Thousands of demonstrators thronged the streets of Budapest on Monday night to protest against the battery of political and cultural reforms that were formally enshrined in the constitution by parliament and came into force on 1 January.

While the Prime Minister celebrated the occasion inside the Budapest Opera House, the protesters gathered outside, forcing him and his entourage to leave by the back door. It was the biggest political protest Hungry has witnessed since 1989.

Among the protesters was a group of former political dissidents who opposed communist rule until its overthrow. In a statement they accused the Orban government of "destroying the democratic rule of law" and pursuing a systematic policy of closing institutions which have the power to criticise the government.

"The new constitution unwinds the checks and balances that we brought in in 1989," said Sandor Szekely, one of the organisers of the protest.

Anything that smacks of unacceptable left-wing thinking is being singled out as a target for denunciation or destruction by the Orban government's culture police. Appropriately, its Kulturkampf starts right in front of Budapest's magnificent neo-Gothic parliament building where Fidesz was swept into office with an apparently omnipotent two-thirds majority in 2010.

On a patch of grass outside stands a monument to the working class poet Attila Jozsef, depicting him humbly sitting on the ground. Jozsef committed suicide by throwing himself under a train in 1937, but his poems are regarded as classic examples of Marxist humanist writing. Yet the Orban government has plans to permanently remove the Jozsef monument from its present commanding position. Fidesz MPs have let it be known they object to monuments to such left-wing icons being displayed outside parliament.

At the New Theatre, director Mr Marta will shortly be replaced by the veteran right-wing author Istvan Csurka, founder of the nationalist Hungarian Party of Truth and Life. Mr Csurka is a friend of Viktor Orban's. His party entered the Hungarian parliament in 1998. Yet Mr Csurka, a man still regarded as a national hero for his arrest during the Soviet crushing of the 1956 Hungarian uprising, is also a renowned anti-Semite who is convinced Zionists are planning to establish a second home in Hungary.

His close associate at the New Theatre will be Gyorgy Dorner, a 58-year-old actor who says he wants to rename the playhouse Home Front Theatre and end what he calls the "degenerate, sick liberal hegemony" that exists in Hungary. Last year Dorner attracted attention after he recited patriotic poetry at a political rally of the neo-fascist Jobbik party. Such obtuse political intervention in the arts has prompted widespread criticism.

"Hungary was once one of the most promising countries in Europe, but the Orban government has turned the country into the continent's black spot," said the Socialist MP Tibor Szanyi. Yet the government claims that an election which gave it a so-called "super-majority" allows it free rein to impose its new order. Opinion polls suggest, however, that support for the government has fallen by 50 per cent since 2010.

Mr Orban's Kulturkampf does not end with theatres. His government is investigating 82-year-old Agnes Heller, a former dissident and one of Hungary's most renowned philosophers. She stands accused of wasting EU subsidies and has been subjected to a vigorous denunciation campaign by the right-wing press.

The media is another key target. Critical voices are unwelcome. Budapest's Klubradio is a prime example. The station was one of the few broadcasters critical of the government and had about half a million listeners. The station suddenly lost its licence last year and was replaced by Autoradio, a pro-government broadcaster. Andras Arato, former owner of Klubradio, accused the government of destroying freedom of opinion. "We are experiencing a war between Viktor Orban and democrats," he said.

The new constitution also withdraws official recognition from over 300 religious denominations, including Islam, Buddhism and several Catholic orders.

Critics such as the publicist Rudolf Ungvary say the Fidesz government's actions are a belated knee-jerk response to decades of communist rule, which has somehow gone horribly wrong. "The right-wing in Hungary are politically stuck in a 1948 time warp. They stopped thinking at that point and only started again in 1989," he said.

Yet for the moment, the financial crisis that has enveloped Hungary over the past week appears to be waning. A Hungarian government delegation flies to Washington this weekend for key negotiations with the IMF over a badly needed €20bn loan to ease Budapest's debt crisis. Given the scale of the current crisis over the euro-forint exchange rate, the Orban government appears ready to back down over plans to impose political control over the nation's central bank, which has caused a rift between Hungary, its lenders and the European Union.

Yet Hungary's Kulturkampf looks set to continue unabated. Janos Samu, an analyst from Budapest's Concorde investment, said the realities of the financial markets appear to have convinced the government of the impracticability of its central bank plans. "Its cultural agenda," he said, "is another matter".

'Everyone is afraid' - voices from Budapest

Attila Szervac

Teacher

"I believe Orban is a paranoid megalomaniac madman... [the government] should either resign immediately or make urgent and significant changes in their policies so that Hungary can re-contribute to the European Union's sustainable development."

Imre Fehes

Bartender

"It's a horrible situation. Nobody knows what will happen. Everybody's afraid. A lot of Hungarians have loans – household loans are easier to get than business loans: that's the problem. Fidesz wants more money than it did when the party was in power before. It is disgusting."

Reka Forrai

Academic researcher

"Orban is like Italy's Berlusconi – many voted for him, not because they like him, but because they are like him. We are all little Orbans, doing in small what he does on a great scale: big words, but small steps, improvising instead of planning, martyrdom instead of responsibility."

Rozália Balassa

Student

"Two thirds of university students have to pay to study... some people like this, some don't, but nobody expected it. Many medical students go to the UK. But there are too many lawyers and government workers. From 2012 there will not be so many – this is good, as the value of lawyers has been dropping. Things are a little better than under the previous government. The long term is good, but the short term looks bad."