Early in his new novel, Umberto Eco has his troubled and troubling Italian protagonist, Captain Simonini, habitué of the lower depths and grub streets of belle époque Paris, meet a certain Dr Froïde. The doctor belongs to a race Simonini is less than sympathetic to. Our anti-hero dreams about Jews nightly. They are at the very top of an obsessive hate-list on which Germans, Jesuits, Masons, French, Communists, Italians and, ever since he was rejected as a teenager, women appear in fulminating order.

In our world of political correctness, it's something of a visceral shock to be plunged into the slime of group invective. But Eco has his reasons: stereotypes have underlying narratives which can turn any "other" into the enemy. The Prague Cemetery illuminates the process and also shows how people are seduced into believing fabrications.

Only fine food and drink are to the misanthropic Simonini's taste and it is Chez Magny, where literary giants such as Flaubert and Gautier once gathered, that he encounters Froïde around 1885. The doctor, who brings tales of Charcot and his Salpêtrière stars of hysteria, turns out to be far more genial than Simonini anticipated. Indeed, without his disquisitions on splitting, displacement and forgettings, the Jekyll-and-Hyde diary that makes up this book might never have come into being.

Simonini is a sometime antiquarian, versed through his early studies as a notary in the production of false, expertly-aged documents. By 1897, he has begun to suffer from severe memory lapses and a creepy sense that someone else has been in his room, perhaps even in his clothes and skin. In hope of cure or at least a solution to the mystery, he takes up Dr Froïde's cue. He engages in memory work and reconstructs his life on the page. Dreams and details bring scenes into focus. Swathes of buried life appear.

And what a life it turns out to be - from Garibaldi's red shirts at one end to the Dreyfus Affair at the other with a host of secret-service shenanigans, murders, and Masonic and Satanic tangents in between. Plots proliferate, bombs explode. There are lucrative spying links in Russia, Germany, Italy, France and even America. If Simonini can't remember his double-agent past, it's that there's so much foul matter in it, so many lies that even he can't face. Like a tyrant, it would be best for him if he could make history disappear.

So far, so Eco: a noisy critic of Berlusconi's and author not only of astute critical essays on our texts and times, but of those erudite and sometimes farinaceous bestsellers known as Euronovels. The Name of the Rose, written when he was already 49, was one of the first to mingle culture high and low - philosophy, medieval scholarship, the detective story – in one gripping tome. Foucault's Pendulum, his journey into Gnosticism and conspiracy theories, has latterly been dubbed the thinking person's Da Vinci Code. But Eco is at home in history in a way that Dan Brown is not. Baudolino travelled into the 12th century, The Island of the Day Before, the 17th. Apart from Simonini, almost all the characters, even the most outlandish and obscure, in The Prague Cemetery existed.

Eco has a sure grasp not only of historical fact but of a period's literature. He's a dab hand at intertextuality. In The Prague Cemetery there are two reigning French masters of adventure and intrigue in play: Alexandre Dumas, whose endless Joseph Balsamo tells the story of the occultist and forger also known as Cagliostro; and Eugène Sue, whose Mysteries of Paris was the bestselling popular serial of its day, bringing the working class into fiction and the novel to the populace.

Like its 19th century kin, The Prague Cemetery comes complete with illustrations – many from Eco's own vast collection, including some stomach-churning anti-Semitic images and the jacket of a forgotten book by Leo Taxil, a popular anti-clerical polemicist who in this novel works for Simonini. He, in turn, earns a sizeable fortune by selling his nefarious services to a variety of competing spy-masters: he has a hand in the forgery which launched the Dreyfus Affair.

The novel takes its title from the ancient Jewish cemetery in Prague where, according to the ultimate anti-Semitic hoax, the Rabbis of all the leading nations gather to conspire in their purported plans to become masters of the universe. These infamous Protocols of the Elders of Zion, sold to Rashkovsky, the head of the Russian secret police in Paris as "authentic" documents, are here presented as Simonini's ultimate concoction – a fiction, based on earlier writings but also inspired by Simonini's childhood lore.

Eco has been criticised by the Chief Rabbi of Rome for dredging up anti-Semitic materials which still have a rampant life. His intent in exposing the moment that lies at the origin of modern anti-Semitism seems to be to show how fictions can have factual consequences. Contemporary spin-doctors take note. Lies, particularly if they follow the pattern of paranoid conspiracies and create an enemy, can have dire effects. For Eco, religious texts are of this kind. "People are never so completely and enthusiastically evil," claims his ranting narrator, "as when they act out of religious conviction."

Not being a great fan of Dumas or Sue, I would have loved to take my editorial pencil to this book and some of its spins and twists. But Eco is a comic master and, in his 80th year, his irreverent intelligence, if not always his plotting or scabrous taste, remains bracing.