It is getting dark in Aden, and Theguardian, trailing a long sword through the dirt on the edge of a mean village of barns and lean-tos, is fed up and a little bored. The rough tracks through the trees are littered with the corpses of goblins which Theguardian has slain for want of anything else to do. In truth, they are easy kills, and slaying anyone does not correspond to good journalistic practice. But Theguardian, my avatar, has spent a real hour in a nonexistent world with more than four million paying residents, and nobody has been willing to talk to him so far.

Broad-shouldered men with jackboots and flowing capes dash across the mud. Barbie-doll elven women in pink miniskirts and bra tops loiter by the woodsheds. Each of these electronic incarnations on the screen represents an actual person somewhere in the world. The real individual could be anywhere on the globe. Here, they are all Adenites.

For no clear reason, an elf woman starts beating Theguardian with a sword. Tapping away at the keyboard, I try to explain that I am not, as I appear to be, a novice knight with the build of an American footballer in silver plate armour, dragging a sword the size of a broom handle, but a reporter in London. The elf woman stops attacking me and, without a word, teleports away into nothingness. This keeps happening. But I must persist. This is not an abstract electronic quest. This is not about points on a scoreboard or racing for a finish line. This is about money.

Most of us are familiar with the idea of conventional computer games: you buy, borrow or steal a piece of software for a desktop computer or a PlayStation-like console, load it up, and use a keyboard or mouse or joystick to steer a character through a challenge. You race a car round a course, or run a football team, or kill monsters, or slay gunmen. The game ends: you start again, or buy another. You can play with a friend, or with a few friends over the internet - but it's still a game that ends and, for those dissatisfied with reality as it is, that's not good enough.

Now, most notably in east Asia but increasingly in the US and Europe, another kind of computer game is gaining ground which, financially and emotionally, blurs the boundary between the real and the computer-generated. In the software business, the games go by the indigestible acronym MMORPGs (massively multiplayer online role-playing games), but they are more easily understood as virtual worlds. Aden is a virtual world in an online game called Lineage, created and run by a Korean company, NCsoft. Lineage's four million mainly east Asian subscribers make it the biggest, although the more recent Japanese virtual world of Vana'diel, in the game Final Fantasy XI, which has a large following in the US and is about to launch in Britain, recently passed the 500,000-inhabitant mark.

The most curious element of the virtual worlds is not the fortunes they are making for their creators, though these are real and remarkable enough; NCSoft's profits run at £5m a month: unlike conventional computer games, which players pay for only once, virtual world residents pay a monthly fee, typically about £10, for the right to stay alive in these privately run existences.

No, what is most bizarre about the virtual worlds, in which all players were supposed to start out equal and acquire wealth and status by their own efforts, is that the inequality of the real world is sluicing into them. Players who are wealthy in the real world are using real money to buy virtual goods and virtual characters from players who are real-world poor. Players who, in the real world, are time-rich and cash-poor are putting in hours of graft in the virtual world, killing virtual monsters, seeking out virtual treasure and giving themselves IT worker's lumbago to produce nonexistent magical weapons and characters, which can then be sold for thousands of dollars on the internet.

At first encounter, the virtual-world concept seems simple - an ingenious merger between two familiar PC-age institutions: the fantasy role-playing game and the internet chatroom. At any one time, thousands of people are online in the same virtual world as you, dressed up as magicians or dwarves. Sometimes you chat to each other, sometimes you try to kill each other, sometimes you gang up to fight another gang for control of a castle. Sometimes you sit on someone's lap and talk.

But just as you are more likely to be killed if you are poorly equipped and inexperienced, so you are less likely to be chatted to and invited to join a gang if you are poorly equipped and inexperienced. In order to get equipment and experience, it is necessary to carry out dull, repetitive tasks, like slaying goblins, or testing your sword against a training post.

With my ridiculous armoury in the twilight squalor of small-town Aden, as the novice knight Theguardian, I begin to have a strange, familiar feeling. As I hack away, clicking the cursor over and over again and watching Theguardian's claymore wearily whacking a virtual straw dummy, I start to think: "This is not a game. This is not fun. This is hard, dull work." The virtual Protestant in me thinks: "If I don't do this, I won't get anywhere in this world." At which point I think: "Couldn't I pay someone else to do it for me while I go and do something more worthwhile?"

This is exactly the point at which the virtual and real worlds collide. A US economist, Edward Castronova, who spent months roaming the virtual world of Norrath in Sony's game EverQuest, used exchange rates based on black market internet prices for virtual goods, virtual money and pre-developed characters to calculate that Norrath's real-world GNP per capita makes it wealthier, citizen for citizen, than China or India.

He found that almost a third of adult subscribers spend more time in Norrath in a typical week than they do working for pay in the real world. He writes: "One can almost believe that many people do live there, wherever it is, and not on earth."

Officially, the companies that run the virtual worlds don't approve of the selling for real money of virtual items: according to their rules, players who are caught doing it will be kicked out. Lance Stites, of NCsoft's US subsidiary in Texas, points out that if the firm acknowledged a real value for unreal things, it could face legal action from players. "If something's got real-world value at some point, we've got an obligation," he says.

Yet the buying and selling of online goods and avatars is being carried out so brazenly that it is hard to believe the corporations are as worried as they claim. A Hong Kong-based company, IGE Ltd, employs 50 people exclusively in buying and selling nonexistent wands, weapons, cloaks and virtual currency from virtual worlds such as EverQuest. Another firm, Team VIP, will sell you 10m adena - the virtual currency in use in Lineage - for 250 real US dollars. A third site, mysupersales.com, offers EverQuest "spider venom" for $699.30. The venom isn't real, nor are its effects, and, more intriguingly, any "advantage" that the buyer might gain from using it would seem to be confined entirely to the microcircuits of a humming server in San Diego, California.

Mysupersales.com specialises in selling avatars - virtual characters which a subscriber has brought to in-game wealth and power at the expense of real-world advantages, such as a social life. One recent avatar being sold was a level 74 magician for Final Fantasy XI. The asking price, for a collection of numbers in a computer that will never exist outside a fantasy world, was $1,299.99.

If it seems extraordinary that anyone would consider paying the best part of £700 for a virtual magician, you are unfamiliar with the lurid tales of the addictiveness of virtuality. EverQuest is popularly known as "Evercrack" among hardcore Norrathians. "The sad truth is that, in many ways, EverQuest is better than real life," an anonymous 36-year-old woman player told a US psychological researcher, Nicholas Yee. "It is easier to succeed in EQ, I can be beautiful, fit and healthy in EQ - in real life I am chronically ill and there isn't much fun or achievement to be had."

Some date the origin of virtual worlds to the dawn of the internet itself, pointing to the work of a group of Dungeons & Dragons-obsessed students at Essex University in 1979, led by Roy Trubshaw and Richard Bartle. They were the first to work out how their simple text-based computer fantasy games could be played simultaneously by multiple players around the world, linked by early international computer networks.

For the next two decades, however, the increase in the power of home computers outpaced the increase in the speed of the internet that connected them. Only recently, with the widespread availability of cheap, fast internet connections - broadband - has it become possible for thousands of players, thousands of miles apart, to talk, band together and overcome the same virtual challenges, in the same vividly created virtual world, at the same time.

South Korea has led the world in broadband access, and most of the four million players of Lineage are Korean. It was in Korea last year that a 22-year-old man, identified by JoonAng Daily as Mr Jin, was arrested for playing the new version of Lineage, Lineage 2, in an internet cafe without paying. He started playing the game on November 29 and was finally dragged from the computer on December 17, 438 hours and 38 minutes later. Police reported that he had not washed during that time.

According to the Korean national police agency's Cyber Terror Response Centre, 70% of crimes committed by young people are related to virtual worlds, mostly attempts to steal virtual money and virtual items. In October 2002 a 24-year-old man, Kim Kyung-jae, died of a DVT-like illness after playing an online game, Mu, virtually nonstop for three and a half days. "I told him not to spend so much time on the internet," his mother told the BBC. "He just said, 'Yes, Mum', but kept on playing." (According to Lance Stites of NCsoft the company has taken steps to encourage players to keep the distinction between real and virtual worlds clear. Now, messages appear periodically on screen reminding subscribers to "stretch your legs and see the sunshine once in a while".)

The lure of the virtual worlds is not difficult to understand. They resemble real life in that there is no specific, common goal, no "game over". There are quests, tasks, narratives, but the game continues when and whether these are completed. The only remaining goal, then, is to find out why you are there in the first place; and because, unlike real life, the gods, the bureaucrats and the bosses are one and the same, there is a sense that one day you might actually be told the meaning of virtual life, that the grand design might be revealed. "A competition has arisen between earth and the virtual worlds," writes Castronova, "and for many, earth is the lesser option."

Back in Aden, I have made some progress. I have reached a larger, busier town, where other player characters are crying out their wares for sale. SELLING KILLER RABBIT keeps scrolling through my message box. That is one of the intelligible cries. Mostly it sounds like the pit of a futures exchange. A squat green creature going by the name of Yogurt is screaming over and over: "49 brings 105 rough 132 iron." Yogurt agrees to talk. "Let me get dressed," he says, and returns a few moments later in the form of a black-robed wizard with a blue light on the end of a stick. Lineage, Yogurt explains, allows players to disguise themselves as monsters once they reach a certain level, hence his homunculus disguise.

In real life, Yogurt the wizard is a 26-year-old American, hunched over a computer in Okinawa, Japan, at one in the morning (it's mid-afternoon in London). Yogurt won't tell me what he does for a real-world living, although almost all the young American males in Okinawa are serving members of the US military. He could be tall, short, fat, thin, spotty, black, white. He could be a she. (About half the male players in EverQuest and a quarter of the females have at least one avatar of the opposite sex.) All I know is that in the real world Yogurt is unable to cast spells and will never meet a Zombie Lord of Fear. Yogurt has inhabited the virtual world of Aden for six years.

I ask where all the Koreans are. Yogurt points out a peculiarity of the virtual worlds: that their vast subscriber populations are divided up over a number of different servers. Each contains the same virtual world, with the same landscape, magic and monsters, but each has a different set of players. The Koreans have Korean-language Adens; we are on a server that provides an English-language Aden. Each server can deal with about 5,000 players at one time.

"The Korean servers are very overpopulated, from what I hear," says Yogurt. "I kind of like it here. It's nice and relaxing." Behind us there are scenes of terrible carnage involving elves, magicians, giant spiders and a group of characters who look like sumo wrestlers. The clash of weapons sounds from the speakers and the screen flashes with explosions. Another giant spider and a werewolf cut across our path, a disembodied eye shimmies through the air, the fighting continues and a wizard makes it snow. Is it always like this? "No," says Yogurt. "Just when 12-year-olds get bored."

Yogurt is a member of one of the gangs of players - known as blood pledges in Lineage - which are a feature of the virtual worlds. Some two dozen people, unlikely to meet each other in reality, unite their avatars to kill monsters, win status and wealth, take a virtual house in a virtual town together and go on virtual picnics in the virtual countryside. "It's the people who make it fun. The game itself is boring. It always has been," says Yogurt.

Yogurt and another member of his pledge, Slowmotion, whose real self is in Miami, take Theguardian on a teleport tour of Aden. We go into a bar in a virtual town called Giran. The place is empty. It is impossible to drink virtual beer anyway. Nor can we sit down. "My legs don't bend," says Yogurt.

Yogurt and Slowmotion take me to a cathedral where characters can get virtually married. "This is another aspect of the game that I frankly think is dumb, but come on in," says Yogurt, and we walk inside a conventional Christian space with rows of pews facing an altar. "This guy says blah blah blah, you may now f_ck that bi_ch," says Slowmotion, a busy, fidgety avatar whose current form is a green dwarf but who acts and talks like South Park's Eric Cartman.

The last stop is a place called Lawful Temple, a pool in a forest where characters can learn spells. Slowmotion dashes off after a wild boar that has crossed his field of vision and slays it. Yogurt and I are hanging out by the pool. A certain street-corner aimlessness infuses the mood, and a certain bitterness - virtual politics, of a kind. Yogurt has already told me how much he hates the new version of Lineage, which has drawn some of his pledge buddies away into another world where he no longer meets them. Old-time virtual-world inhabitants grumble about the capitalist-bureaucrat gods who control their virtual existence. The players are the ones who have devoted great tracts of their real lives to the game; but ultimately the game belongs to the corporations, not the players. They can break up old worlds by luring players into new ones. Ultimately, they can close down a world altogether, killing the last die- hard inhabitants - and all their years of toil and emotional investment - with the flick of a switch.

"Is this going to go on for ever, you and this game?" asks Theguardian.

"Well, I pay $15 a month, about two times the cost of a movie ticket," says Yogurt.

"Are you worried they might close this world down one day?"

"Nope."

My screen is small, and it is hard to see the Lawful Temple with the bright afternoon light coming in from the London street outside. It's just before noon in Florida but in Okinawa, in the darkness in the small hours of the morning, the virtual trees in the virtual forest around the virtual ornamental pool must look more vivid than "RL", as hardcore online players call real life. "Lineage isn't reality?" asks Yogurt rhetorically. He looks around, by typing "(looks round)", and laughs, by typing "hehe". I think he means that it is.