Susannah is being treated in the physiotherapy unit of the Centro das Taipas, a vast, pink former mental institutution close to Lisbon's airport, where she is having hot towels pressed on to her lower back. Built during the second world war, the wards of wing 21B are these days committed to the treatment of drug addiction.

Susannah is a long-term drug user and is intelligent but troubled. She first smoked cannabis at 13. At 17, she began taking heroin with the father of her children. Now 37, she has been dependent on drugs – mostly heroin – for almost two decades.

"I lived in Spain for a while," she tells me. "And London for a year, working in the restaurants with a friend. I went there to try to get off drugs but ended up on crack." These days, however, Susannah, who also suffers from a bipolar disorder, is one of the beneficiaries of Europe's most tolerant drug regime. For in Portugal, where Susannah lives, drugs have not only been decriminalised for almost a decade, but users are treated as though they have a health and social problem. Addicts such as Susannah are helped by the law, not penalised and stigmatised by it.

In the midst of the recently resurgent debate in Britain about whether our drug laws are working – or require a major overhaul – the experience of Portugal has become a crucial piece of evidence in favour of a radical approach that has confounded the expectations of even its conservative critics, so much so that in the last month British officials have asked their Portuguese counterparts for advice, with the only caveat being that they avoid mentioning the word "decriminalise".

It is, perhaps, an unnecessary sensitivity. For the reality is that, despite liberalising how it regards drug possession – now largely an administrative problem rather than a criminal offence – Portugal has not become a magnet for drug tourists like Amsterdam, as some had predicted.

British officials are not the only ones who have made the pilgrimage to Portugal in recent years – health specialists, officials and journalists from around the world have all made the journey to see what Portugal is doing right, even as their own countries are still struggling.

Nor has it seen its addict population markedly increase. Rather it has stabilised in a nation that, along with the UK and Luxembourg, once had the worst heroin problem in Europe.

For Susannah – as for the many long-term addicts now on methadone replacement and other programmes, and for the country's health professionals – the country's recent social history is divided into what the world of addiction and drug use was like before Law 30 was approved in November 2000, and what it is like now.

Before the law, which decriminalised (or depenalised) possession of drugs but still prohibited their use, the story of drug addiction in Portugal was a familiar one. More than 50% of those infected with HIV in Portugal were drug addicts, with new diagnoses of HIV among addicts running at about 3,000 a year. These days, addicts account for only 20% of those who are HIV infected, while the number of new HIV diagnoses of addicts has fallen to fewer than 2,000 a year.

Other measures have been equally encouraging. Deaths of street users from accidental overdoses also appear to have declined, as – anecdotal evidence strongly suggests – has petty crime associated with addicts who were stealing to maintain their habits. Recent surveys in schools also suggest an overall decrease in drug experimentation.

At the same time, the number of those in treatment for their addiction problems has risen by about a third from 23,500 in 1998 to 35,000 today – helped by a substantial increase in available beds, facilities and medical support – with many going on to methadone replacement programmes. The consequence is that perhaps as much as €400m (£334m) has been taken out of the illegal drugs market.

But decriminalisation, as Portuguese officials and others who have observed the country's experience are at pains to point out, was only the most obvious part of what happened 10 years ago in the midst of a similar debate on drugs to the one now going on in the UK.

Then, in a moment of grand vision powered by an inquiry which recommended a wholesale overhaul of Portugal's anti-drugs policy in 1998, the government opted to make wholesale changes to the way Portugal dealt with the issue, giving a huge boost in resources to everything from prevention to harm reduction, treatment and reintegration – creating an entirely joined-up approach to drug abuse under the auspices of a single unit in the ministry of health.

It marked an acceptance that for many, living drug-free was neither realistic nor possible and that what society needed to do was mitigate the risk individuals posed to themselves and a wider population at large by helping them manage their problems.

Susannah's doctor, the head of treatment at the Centro das Taipas, is Dr Miguel Vasconcelos. He frames Portuguese drug laws in a way that I hear repeated several times. Within certain clearly defined limits – an amount equivalent to 10 days' normal use of any particular drug, ranging from amphetamines and cannabis to heroin – possession, he explains, is now considered similar to a traffic offence. It is a notion I find later described in the Portuguese drug strategy document as a "humanistic" approach.

Vasconcelos, 51, is old enough to remember what it was like before, in a country which, two decades ago, barely had a methadone replacement programme at all. In his office, decorated with artworks by his clients, Vasconcelos says: "Critics from the conservative parties were concerned that the new law would make Portugal a place like Amsterdam, but that did not happen.

"You have to remember," he says, "that the substances are still illegal; it is the consequences that are different." And for those arrested in possession of drugs for personal use, that means not a court appearance but an invitation to attend a "dissuasion board" that can request – but not insist upon – attendance at facilities such as the Centro das Taipas for assessment and treatment. "They evaluate if someone is ill or a recreational user, if a person uses sporadically," says Vasconselos. "Even then people have a choice. People can refuse to attend the dissuasion board."

For many, he believes, the experience can be cathartic and he admits being surprised by how open many of the clients who have come to his facility via that system have been .

If there has been a problem with the Portuguese experiment, he believes that it has been one largely of perception – outside Portugal – where decriminalisation has been misunderstood by some as legalisation or a step on the road to it.

Rather, Vasconcelos believes that decriminalisation is a natural consequence of a gradual shift from regarding addicts as social delinquents to regarding them as people in need of help, a view reiterated by Dr Manuel Cardoso, a board member at the Instituto da Droga e da Toxicodependência at Portugal's health ministry, which now co-ordinates the country's approach to drug abuse.

At the centre of Portugal's deeply pragmatic approach are the dissuasion boards. Lisbon's board – which deals with 2,000 cases a year – sits in a modest office on the second floor of a block above a pretty park. There are no lawyers (although they can attend) and no clerks in robes. No uniforms at all.

Last Friday, on one side of the table were Nadia Simoes and Nuno Portugal Capaz, both members of the commission. On the other was a 19-year-old barman in a white T-shirt who allowed the Observer to observe the confidential process but asked not to be named.

Stopped by police with 5.2 grams of cannabis, he is marginally over the limit of what can be dealt with by the dissuasion board alone and has had to appear in court as well. It is the young man's first offence. He looks nervous. But it quickly becomes clear that this is a non-confrontational process, as Simoes explains that while possession of drugs for personal use is not a criminal offence, it is still forbidden.

The man nods his understanding. Simoes explains the risks of smoking cannabis, including schizophrenia, and the sanctions the board can impose for second offences, including a fine or community service. Licences crucial to employment can also be revoked. As the process concludes, the barman looks relieved and promises to stop smoking. As he leaves, Capaz stands up and shakes his hand. The whole thing has lasted less than 10 minutes.

A sociologist by training, Capaz is a vice-president on the board. He believes that far from Portugal becoming more lenient, the reality is that the state intervenes far more than it did before Law 30 and the other associated legislation was introduced. Before, he explains, police would often not pursue drug users they had arrested, interested only in the dealers. "People outside Portugal believe we had a tougher approach under the old law, but in reality it is far tougher now."

Now everyone who is caught with drugs must go before one of the 20 boards in the country to be categorised as either a recreational user, someone with a developing problem, or an addict. And while some 30% choose to refuse to appear at the first summons, most – when threatened with a fine for disobedience – eventually attend.

Capaz has been involved since the very beginning and is struck by two things. The first is how Portuguese society has come to accept that addicts and drug users should be treated as a social rather than a criminal problem. The second, he explains, is that under the old criminal system all of those caught were supposed to be equal before the law. "With this system," he explains, "We do it the other way. We can apply the law in a way that fits the individual."

Indeed, the law recognises that for addicts certain sanctions are not appropriate. While recreational users can be fined, the law prevents addicts from having a financial penalty imposed for fear that in trying to raise the fine they might be driven to commit a crime.

But not everyone is totally convinced. Not even among the people who have dedicated their lives to assisting addicts. Francisco Chaves runs a modern shelter for street addicts close to Casal Vendoso, a place once notorious for its drug problems. "I want to explain first that this is not my profession but a vocation," he explains by way of introduction. He wants, however, to pose a "rhetorical question" which turns out to be more passionate intervention than a debating point.

He is concerned that under the "humanistic approach" enshrined in Portugal's decade-old laws – in its concern for the human rights of the addict – perhaps too much pressure to change may have been taken off addicts. "I worry that it has become too easy being an addict now," he says. "They can say: 'I've got clean clothes. I've got food. Support. So why should I change?'"

He says this sadly, because he agrees that addicts should be treated properly but cannot avoid "the paradox of the situation". "I say it is a rhetorical question because places like this are required. It is a personal, philosophical question." But it is one without any obvious answer.

Outside his office in the large, bright space where addicts are lolling on the sofa, eating or watching television, I encounter Fernando Almeida, 31, who has been a heroin addict since he was 19. A thief – who stole to support his habit – he was recently released from prison and found a place at this centre.

When he arrived six months ago, he weighed 55 kilos. These days he weighs 73kg and appears both lucid and motivated. "In the old days I used to get hassled by the police. Now the police don't interfere with me," he says. "I used to steal. Now I'm not going to steal anymore. For me the solution is to stop. I've discovered food and small things like taking a walk and having a coffee. I'm learning how to work."