You probably haven't heard of Johanna ter Steege, even if the legendary American film-maker Stanley Kubrick once called her the best actress he knew. Ter Steege, who was born in 1961, has had a reasonably successful career, appearing in such films as George Sluizer's The Vanishing (1988), Istvan Szabo's Sweet Emma, Dear Boebe (1992), and Bruce Beresford's Paradise Road (1997) but she is hardly a household name, even in her native Holland.

It could all have been so very, very different. The actress chuckles as she remembers the circumstances in the early 1990s when she was summoned over to St Albans to meet Kubrick. He wanted her to play the lead in his "Holocaust" film, The Aryan Papers, which he was planning to adapt from Louis Begley's semi-autobiographical novel, Wartime Lies. If the film had been made, she would have become a huge international star.

"He [Kubrick] was convinced that he had found an actress whose performance would catapult a new star to the forefront of international stardom and give this dark and serious film the needed 'gloss'," Kubrick's brother-in-law and producer Jan Harlan has said of Ter Steege. He believes that it was "devastating" for her that the film wasn't made. "It's like a young musician getting his first Carnegie Hall [concert] and then being told you can't do it. It must be terrible, after you've prepared yourself for months and months."

Download the new Independent Premium app Sharing the full story, not just the headlines

The movie may have been abandoned but audiences will at least have the chance to experience the "ghost" of The Aryan Papers through a new installation by the Turner Prize-nominated artists Jane and Louise Wilson, which will be shown as part of next month's Stanley Kubrick season at BFI Southbank. The Wilson sisters have scoured the Kubrick archives for stills and information about the movie, poring over wardrobe research stills and period stills.

As Jan Harlan reveals, Kubrick had been trying to make a Holocaust-themed drama for more than 20 years. It was a daunting challenge – how do you condense one of the most horrific episodes of the 20th century into a two-hour dramatic feature? Kubrick had no desire to make a documentary. At one stage, he had considered making a film set in the German film industry of the Nazi era, as propaganda chief Joseph Goebbels was pulling the strings. However, he couldn't find a story or script that satisfied him.

When Harlan approached the novelist Isaac Bashevis Singer on Kubrick's behalf to ask him to write an original, Holocaust-themed screenplay in the 1980s, Singer responded: "I don't know the first thing about it." What Singer inferred was that an outsider couldn't begin to do justice to the Holocaust. This was certainly a subject too challenging for a film-maker – even one as brilliant as Kubrick – to have any chance of interpreting in a meaningful way in a dramatic movie. Chastened by Singer's remark, Kubrick continued to do a huge amount of research. Eventually, in Begley's novel (published in 1991), he found a book that was both intimate and authoritative.

"It's a big, risky topic," Harlan says today of Kubrick's screenplay for The Aryan Papers. "It is not a drama that is over-the-top and has lots of action. It is a very silent film, a very serious film. The tension is in this horrendous, low valley of humanity that existed because of the Nazis."

The role of Aunt Tania in Wartime Lies would have been extremely demanding. Ter Steege was to play a beautiful and acerbic Polish-Jewish woman who helps her young nephew Maciek escape the Nazis by pretending to be Catholic.

"He [Kubrick] phoned me. We talked for 30 minutes on the phone. He asked me several questions about the films I had done – very specific questions," the actress recalls of her first talk with the film-maker. He had seen her films several times and was in deadly earnest about casting her. Ter Steege was summoned over to England to meet Kubrick for a screen test.

Bizarrely, during their first meeting, Kubrick asked her questions about sport and about Richard Krajicek, the Dutch tennis player. He was cordial and polite: very different from his reputation as a Prospero-like hermit. "He was very, very interested in who you were. He was interested in me as a human being, not as an actress. He asked me political questions. We talked about acting. He asked me about the Germans – how I related to the Germans."

The blonde Dutch actress, who grew up on a farm, had relatives who had been part of the Dutch resistance. She knew many stories: that her grandparents hid Jewish refugees from the Nazis; that her uncle had to flee the Germans. She wasn't Jewish herself but there was enough in her family experience for her to understand a character like Aunt Tania.

Ter Steege recalls that she was first embarrassed and then grew angry when Kubrick kept on telling her she was the best actress he knew. "I said: 'Stanley, that's not true.' Then he said it again. Then I said: 'I really don't like it when you say that. First of all, it's not true and I always say that I am as good as my director. If you tell me I am the best actress you know, you give me a huge responsibility which I can't bear.'"

In hindsight, she thinks that Kubrick was testing her. The flattery was designed to make her feel uncomfortable. "I think he liked it when I got a little bit angry. I felt that he was studying everything I did or said. I remember that he was studying the movements of my hands while we were talking." They met in the kitchen of Jan Harlan's house. Ter Steege had deliberately taken a seat with her back to the windows. "I thought, when he comes in, my face will be in the shadows. I will be able to see him first. He came into the kitchen and said hello. The second thing he said was: 'Can you take another chair?' He put me in the light."

Kubrick filmed her with different lenses as he asked her questions about her childhood and earlier youth. "Sometimes he used lenses that made look very, very young and sometimes lenses which made me look old. In a way, we were working." Late in the evening, Kubrick stopped filming and said to her, "Let's open a bottle of champagne because you've got the part."

In Ter Steege, Kubrick had seemingly found a muse for what would have been his most daring and contentious feature. The director was in great earnest about making the film. Although he was famously reclusive, Kubrick was prepared to leave England to shoot in Eastern Europe.

"He [Kubrick] would very reluctantly have moved himself to Bratislava and to Brno. He wouldn't have liked that but it was no pain, no gain in this case. There was no way you could have done these locations in England," says Harlan.

Kubrick had studied the early episodes of Edgar Reitz's Heimat in detail for ideas for the look of the film. He had even hired Reitz's art director. As preparations got under way, the leading actress was sworn to secrecy.

Back in Holland, Ter Steege waited patiently. She was told that production would begin in three or four months' time. Nothing happened. Harlan called her regularly, telling her that shooting was postponed but not to worry. She didn't take other jobs. Then, after seven months, she was informed that Kubrick had decided not to make the film. News had filtered through of Steven Spielberg's plans for Schindler's List. Kubrick and the top brass at Warner Brothers were worried that The Aryan Papers would suffer commercially if it appeared after Spielberg's movie. It was widely accepted that the box office for his earlier Vietnam war-themed feature Full Metal Jacket had been affected by appearing after Oliver Stone's Platoon. Kubrick didn't want to suffer the same experience twice. The audience, he feared, wouldn't countenance two Holocaust films at the same time.

Ter Steege reacted to the bad news by spending two days in bed with "my head under the blankets." For years, she wouldn't talk about it. Only now, with the Wilson sisters making their installation Unfolding the Aryan Papers, has she agreed to discuss it.

She remains in contact with Harlan and with Kubrick's family. A few years after Kubrick's death, when she was appearing as Countess Geschwitz at the Almeida Theatre in a Jonathan Kent production of Franz Wedekind's Lulu, she was invited with her husband and daughter for Easter at Kubrick's house. "I remember my daughter searching for chocolate eggs near Stanley's grave because he is buried in the garden."

The actress was told by Kubrick's widow, Christiane Kubrick, that Kubrick had grown very depressed "because of all the research he did" for The Aryan Papers.

"We know that he [Kubrick] was a perfectionist. We also know the dangerous thing for a perfectionist is that, at a certain point, he comes to a zero," Ter Steege speculates as to other reasons why the film was never made. Harlan has suggested that Kubrick felt a measure of relief that the film didn't happen.

It remains conceivable that The Aryan Papers project might be resurrected by another director. Warner Brothers hold the rights. Harlan insists that the family would have no objections to a new film version, as long as a capable director takes on the job. "It would have to be really a good director. In the wrong hands, this would become a very cheap movie. But if Ang Lee wanted to do it, I would jump to the ceiling!"

Fifteen years after The Aryan Papers was abandoned, Ter Steege is still working as an actress. This month, she can be seen at the Rotterdam Festival in The Last Conversation, a single-shot, feature-length drama, entirely set in a car, about a jilted mistress making one last phone call to her married lover. When she looks back on the Kubrick film that never was, she can't quite hide the frustration. When Kubrick was preparing The Aryan Papers, top Hollywood agents were courting her. When the film didn't happen, they melted away. The offers which would surely have come her way as star of a Kubrick film failed to materialise.

"What can I say?" the actress asks. "I don't regret what happened. I still feel it as a huge compliment. It was a wonderful experience. The ending was very painful. There was a huge future... then it felt like a huge balloon was suddenly burst. Then, that's it. You have to go on. Not for the first time in my life, I realised that personal happiness has nothing to do with success."

'Unfolding the Aryan Papers', the installation by Jane & Louise Wilson, is at BFI Southbank Gallery, London SE1 (020-7928 3232) from 13 February to 19 April; a Kubrick film season runs at the BFI from 30 January to 28 February

The Kubrick legacy: Four not to miss

Barry Lyndon

This was one Kubrick movie that failed at the box office. A lengthy, slow-moving costume drama, based on a Thackeray novel, it somehow didn't catch audiences' imaginations but it now seems like one of its director's great achievements. As he tells the story of an Irish rogue on the make (played by Ryan O'Neal), Kubrick combines exquisite craftsmanship with bawdy humour. There is also the most devastating moment in any Kubrick film – a death of a child – that makes the criticism that the film is aloof and emotionally frozen seem absurd.

Paths of Glory

Kubrick's anti-war film is driven by Kirk Douglas's impassioned performance as the idealistic French officer appalled by the behaviour of his superiors, who are ready to sacrifice their own soldiers and brand them cowards rather than lose face.

The Killing

An exemplary film noir, leaner and less portentous than some of the director's more self-conscious later efforts, 'The Killing' is about a heist at a race course. The thieves' ingenuity is matched by that of the film-maker telling their story.

Dr Strangelove

So much to savour: the extraordinary production design by Ken Adam, Peter Sellers's virtuoso performances, the trenchant Cold War satire and the unlikely beauty of the imagery (for example, Slim Pickens riding the bomb to oblivion).