On the streets of Alexander City, Alabama, you won't find a single person with a bad word to say about Dr George W Hardy. "He is just the most authentic, alive person", rhapsodises one friend. "He's always smiling and he likes people", adds another. Even his ex-wife struggles to find a flaw in his character. "I can't think of one person who doesn't like George Hardy", she says, a little pensively. "It would be pretty hard not to like George."

It's all the more remarkable, really, when you consider that Hardy is the local dentist not commonly a front-runner for the most popular guy in town. But Hardy, a gentle, grinning beefcake of a man with a blond sweep of hair and teeth as straight and white as a picket fence, is loved by his employees, admired by the local bigwigs for his charitable work and adored by the townsfolk, not least for his turn in the Christmas parade where, year in, year out, he steals the show as a zany, rollerblading tooth fairy. No, you won't find a single person with a bad word to say about Dr George W Hardy in Alexander City, Alabama. Unless, that is, you happen to mention Troll 2.

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"Oh mah garrsh!" whispers his mother, visibly paling. "We don't speak too much about that..." That would be Hardy's turn in the ill-fated 1989 horror movie, Troll 2. Hardy plays Michael Waits, square-jawed patriarch of a perfect family who set off on holiday to the country idyll of Nilbog (read it backwards). There they find themselves at the mercy of a village full of paradoxically blood-thirsty vegetarian goblins who plan to turn them into plants and then feed, orgiastically, on their sap. "I left in the middle. I just couldn't take any more", admits Hardy's mother. "Let's say he's no Cary Grant." "His accent, his acting... it's all just sooo bad", adds a friend.

If the opprobrium heaped upon Hardy's acting debut by his nearest and dearest sounds harsh, it's nothing compared to the derision that has greeted the movie around the world and in cyberspace since its release (straight to VHS, naturally) 20 years ago. It has a rating of 0 per cent on the film-critic website Rotten Tomatoes. To put this in perspective, Plan 9 from Outer Space, for many years thought to be the worst crime ever committed to celluloid, gets a whopping 62 ; Paris Hilton's movie debut House of Wax scores a respectable 26; the Mariah Carey car-crash vehicle Glitter has 7; even Bennifer's disastrous outing in Gigli scrapes 6. Meanwhile, on IMDb, the film has been given its own strand, "Worst Movie Ever Made?", where the bilious comments number well into the hundreds.

"Someone mentioned that they would vote for a 0, well I would like to go beyond that and give this film a -0", says one disgruntled viewer. "Suffice it to say that, if you set any cast member on fire, I would lay down even money that he or she would have a hard time convincing onlookers that it hurt." It is, sums up another comment, "simply the perfect storm of bad writing, casting, direction, cinematography, costuming, score, makeup, effects, acting, editing, and inspiration". It is also now the subject of a new documentary, Best Worst Movie, which has its UK premiere at Sheffield Doc/Fest next week.

Troll 2 is an astonishingly inept film. The plot is insane, the dialogue clunky, the acting even before the humans are transformed into shrubs painfully wooden and the effects shoddy. There is a cinematic first, surely a sex scene inexplicably involving a corn on the cob and a character called Creedence Leonore Gielgud. The goblins are relentlessly unthreatening wobbly dwarves dressed in pillow-filled potato sacks with immovable latex Hallowe'en masks their killing sprees drenched in lurid goo the colour of crme de menthe. And, if we're being really picky, there are no trolls in Troll 2 not one. The film was originally made as Goblins but, aware it had a Four Christmases-sized turkey, the studio changed the title for its American release, hoping to align it with the popular 1986 horror movie Troll and perhaps gain some hapless, unsuspecting viewers along the way. Its Italian director Claudio Fragasso has form, having been involved in similarly bogus sequels Terminator II and Evil Dead V.

For Troll 2, Fragasso cast mainly non-actors from Utah, where the three-week, $200,000, sweltering summer shoot took place. The cast lived off stale pizza, went back to their day-jobs between takes and were expected to provide their own costumes. No-one could understand the script or the Italian production crew. Don Packard, given the part of the Nilbog store owner shortly after being released from mental hospital, harboured murderous thoughts towards the child star. It was, by all standards, a less than ideal shoot.

"We were really trying to make a good movie", recalls Hardy. It was to be his first and last acting job. "I was in high-school plays, always in front of a crowd, pretty much a big ham. I remember people patting me on the back when I was 17 years old and saying, 'you really ought to consider going into acting'. It was a dream of mine. Of course I didn't have the opportunity to make my statement in Troll 2. People just say, 'oh, it's one of the worst bits of acting ever'. But imagine no direction at all, no-one speaking English to you and just giving the script and telling you to read it." Does he regret it? "Fate has its own way. Yes, it would have been great to have done something like Lord of the Rings. You're lucky if you're cast first time in something like that."

Hardy soon gave up his Hollywood dreams and went back to Alabama where he opened a private dental practice, got married and raised a family. "I really didn't want to have much to do with Troll 2. I remember putting the VHS in the machine when it came out and seeing the first five minutes. Honestly, I just couldn't watch it. I let dust collect on that copy for nearly 17 years."

Then something strange happened. Hardy, and others members of the cast, started to receive adoring messages on MySpace. They were followed by videos of fans holding Troll 2 nights, with green-themed food and drink, tribute costumes and private screenings where party-goers could recite every line. A Troll 2 Facebook fan page appeared and racked up 2,032 members. Superfans in Austria sent in photographs of their goblin tattoos. News came in of soldiers watching the film in Baghdad's Green Zone. Nilbog High became the first level in the PS2 video game Guitar Hero II. Twenty years on, the worst movie ever made had quietly become a cult classic.

Michael Stephenson, the child star of Troll 2 who led the fight against the goblins armed only with advice from his dead grandpa's ghost and a double-decker Bologna sandwich (don't ask), was the first to pick up on the phenomenon. Only 10 years old when he landed his first acting role, for many years Stephenson, now 31, had a "rough relationship" with the film. "I thought that I was really going to be a star, that I was making the next Labyrinth or Gremlins. I remember watching the VHS on Christmas morning and seven or eight seconds into it my dad put his head in his hands and said, 'Oh Michael, this is a terrible movie'. It was a Christmas I will never, never forget."

In 2006, Stephenson was working in LA, a jobbing actor and wannabe film-maker, when inspiration struck. "I woke up one morning and I said to myself, smiling: 'Wait a minute! I'm the star of the worst movie ever made! There's a story here...' I had to do it." He contacted Hardy and together the pair went to the first public screening of Troll 2 at the Upright Citizens Brigade Theatre in New York. Advertised on MySpace, it was a sell-out. It was also the first time Hardy had watched the movie all the way through. "I saw people embracing it. It was like a virus that infected everyone. They laughed with it and I thought, 'Oh my gosh, why don't I laugh with them?'" It was a cathartic experience, too, for Stephenson. "I was fascinated by the impression that Troll 2 made on people. Think of all those big Hollywood movies that spend ridiculous amounts of money and they're just forgotten, days after their release. When I was in the audience and saw people having an incredible time, I couldn't deny how positive that felt."

So Best Worst Movie was born, a tragic-comic film about the lives of those involved in Troll 2 and the afterlife of the movie. It premiered at SXSW in March and is already picking up Best Documentary awards on the festival circuit. With Stephenson hidden behind the camera, Hardy is its genial stand-out star. "People went crazy when they saw George at the New York screening and I remember just looking at his face and seeing him brighten, just smile from ear to ear", says Stephenson. "I thought 'this is the guy'. He was in hometown Alabama yesterday filling cavities and now he's appearing in front of 400 adoring fans."

There are other extraordinary characters, too. Connie Young, who played daughter Holly and still refuses to put Troll 2 on her CV; Margo Prey, who played the mother, now a recluse who believes the film is comparable to a Humphrey Bogart and Katharine Hepburn classic "because it's about people"; fiery screenwriter (and wife of the director), Rossella Drudi, who reveals that her script is partly an anti-vegetarianism tract. "I had many friends who'd all become vegetarians and it pissed me off. It's a ferocious analysis of today's society." And then there is Fragasso, a director who lives by the creed, "I don't follow the critics and the critics don't follow me". Blissfully unaware of the shortcomings of his film, he is baffled by the reaction to his work. "When he came to the LA screening and saw the line for tickets, the first thing he said to me was: 'Ah Michael, we have to do a Troll 3! We have to start now!", says Stephenson.

It's precisely this lack of cynicism which has seen Troll 2 become a much-loved cult classic. "Troll 2 is not one of those films that set out to be so bad it's good", explains Stephenson. "Everybody tried to succeed and we failed miserably. There's a brilliance in that. I have a lot of respect for Claudio. He made Troll 2 with all his heart. The worst thing you can do is to fail to entertain and he does far from that."

Best Worst Movie is in the tradition of fine pop-culture documentaries such as American Movie (about the making of an independent horror movie), which scooped the Best Documentary Award at Sundance in 1999) and The King of Kong (about one man's bid to gain the highest ever score on the Donkey Kong video game). It will screen as part of the new comedy strand at Sheffield Doc/Fest, now in its 16th year and one of the top three documentary film festivals in the world, attracting around 1,700 industry types to a programme which this year offers 120 films from 21 countries. Big hitters showing their wares include Nick Broomfield, who will present A Time Comes: The Story of the Kingsnorth Six about the Greenpeace protesters who scaled Kingsnorth power station, while director Kim Longinotto will attend a screening of her Rough Aunties, about a group of women in South Africa who dedicate their lives to caring for abused children. There's also a chance to see Michael Moore's Capitalism: A Love Story, Michel Gondry's The Thorn in the Heart and Videocracy, Erik Gandini's searing expos of Berlusconi's Italy.

Of the new generation, there will be keen interest in offerings from Broomfield and Longinotto juniors. Barney Broomfield's Far From Gone is an intimate look at the lives of two Congolese refugees while Moby Longinotto's The Joneses is a charming 13-minute account of a father who has a sex change after the death of his wife, thus becoming a replacement mother to their children. Another premiere comes from Ivo Gormley, son of Antony, with a look at the gaming scene in Playmakers.

Other highlights include the opening film, Moving to Mars, about a Burmese family fleeing the bloody regime of their native country and settling in Sheffield. The excellent Music and Arts strand has Jonathan Caouette's on- and off-stage record of a decade of All Tomorrow's Parties gigs and films about Woodstock, Anton Corbijn and an Arab-Jewish hip-hop group. With further strands dedicated to Russian, sports and green documentaries, for five days the world will come to Sheffield with films on everything from the Texan petrochemical industry and dolphin culling in Japan to female taxi drivers in Moscow, child boxers in Cuba, gangs in London and teenage heroin addicts in Afghanistan. There are movies about coal, clowns and the civil rights movement, about privacy, piracy, piano tuners and bigamous porn stars. Aside from screenings (which are free for students), there are also masterclasses with RJ Cutler (The September Issue), Franny Armstrong (The Age of Stupid) and Storyville stalwart Leslie Woodhead.

"There's no doubt that the industry is tougher now than it was a couple of years ago", says Heather Croall, director of Doc/Fest. "There is less money. But instead of doom and gloom at Sheffield we've tried to look at opportunities in new media and the international market."

There has been a steady trickle of documentary successes over the last decade, from Moore's polemics to thrillers Touching the Void and Man on Wire, and from environmental blockbusters An Inconvenient Truth and March of the Penguins to Spellbound and this year's The September Issue.

"Before Bowling for Columbine in 2002, there were really no documentaries in multiplexes", says Croall. "They were in art-house cinemas, if at all, or festivals. Now you have The September Issue in a multiplex near you and maybe The Cove, too. Every year there are around six documentaries that do good box office and show in suburban multiplexes: it's amazing."

Sometimes the very best stories are the true stories: "I like stories about people and I like great characters", says Stephenson. "I never considered myself a documentary maker before I made Best Worst Movie, or even wanted to be one, but I can now see why people start making them and never stop." The last word on the magic of documentary, though, should go to Hardy, the genre's latest star-in-waiting. "I'm so honoured that I've gone from one of the worst films ever made to one of the best documentaries that has come along in decades. It's a miracle."

Sheffield Doc/Fest, 4 to 8 November (0114 275 7727; www.sheffdocfest.com)