Pulling each other by the hair, the Roma children scrap as they take turns at flicking their skinny wrists over the flaming funeral candles. Before the same Orthodox Christian shrine, their grandmother recites the Lord's Prayer in a gravelly Romany tongue.

'Am Mora Dat con san ando cheri.' The words leave her mouth in whispers as she crosses herself and kisses a gold crucifix around her neck. The smallest child, no older than four, runs towards me, sticks out her tongue, and gestures a V for vaffanculo - the ubiquitous Italian fuck off - and disappears outside.

The damp ceiling of the two-room prefabricated hut the Gypsies call home is on the verge of collapse. The plastic-film windows, looking out on to the drab exterior walls of Naples's most infamous prison, are so flimsy they wobble in the faint breeze. There are mattresses everywhere: on the floor, propped up against the sink. Like the inhabitants, they are thin and threadbare. The only nod to modernity is a gigantic home entertainment consul in the corner, spewing out a DVD of distorted recordings of Balkan folk songs. The wake we are attending in Naples's most notorious Romany camp has been going for 10 days. Alcohol is scattered around the room; clear, foul-smelling moonshine sits overflowing from plastic cups and reclaimed Peroni bottles; a half-blind mongrel sleeps fitfully among the detritus of a thousand hand-rolled cigarettes.

Alongside a sepia portrait of the revered Capuchin friar, Padre Pio, stand blurry digital prints of 13-year-old Cristina and 11-year-old Violetta Djeordsevic - two Roma sisters whose sudden deaths in the shallow waters of a public beach on Italy's Amalfi Coast last month encapsulated the threat of racism in modern Europe. It is a tragedy that has focused international attention on the ragged edge of Italy's most chaotic city. The teenagers' youth and beauty in the photographs, strangely, comes as a shock. Up until now, like most of the world, I had only seen their prostrate bodies, covered by short beach towels, with just their feet left exposed, on the scruffy beach at Torregaveta, a decrepit seaside suburb on the outer edge of the Bay of Naples.

On the morning of 17 July, Cristina and Violetta, along with their cousins Manuela and Diana, had made the regular journey from the dismal camp we are sitting in to one of Naples's most popular beaches. Walking two miles to the nearest public transport link, and skipping aboard the local train that skirts the coastal cliffs of the city, the girls planned to sell trinkets - small wooden turtles carved by Nigerian immigrants - to daytrippers along the bay. At Torregaveta, after a long hot day with no sales, the sisters dared each other to jump from rocks into the sea. Violetta went first and disappeared, swept beneath the waves. Cristina, the eldest, jumped in to save her. Both drowned, clinging on to each other.

What happened next shocked the world.

The girls were recovered from the sea by a passer-by and later declared dead by a lifeguard who called for help as Manuela and Diana wept, banging their tiny fists on the corpses.

As the police arrived, their cousins, distraught and in shock, were taken away to contact relatives. Two beach towels were used to cover the dead Roma girls. And then something extraordinary occurred.

Summer beach life resumed around the bodies for three hours until an ambulance finally showed up. In the most striking image of all, a couple nonchalantly ate a picnic while looking on at the scene. Another threw a frisbee nearby. The indifference, picked up by newspapers and TV stations across the world, was seen by the country's liberal elite to be the final straw. The most senior Catholic in Naples, Cardinal Crescenzio Sepe, was the quickest to point out the coarsening of human sentiment which the behaviour in Torregaveta represented: 'Cristina and Violetta,' he told the Italian media, 'had faced nothing but prejudice in life and indifference in death; an unforgivable truth.'

In Rome, the government winced. Masters of realpolitik, they knew that the deaths of Cristina and Violetta, both born in Italy but full-blood Roma, had come at a bad time for the nation, forced in recent months to defend itself to its European neighbours on charges of discrimination against Gypsies and immigrants. Prime Minister Silvio Berlusconi, who swept to power for a third time on a thinly disguised anti-immigration ticket, was in the middle of a controversial yet populist programme of fingerprinting the country's 150,000 Roma, some of whose families have been in Italy since the middle ages. According to critics it has become impossible to disguise the Fascist undertones of these actions, and they point to the fact that the first expulsions of Gypsies took place in 1926 under Benito Mussolini. The dictator's political heirs, the 'post-fascist' National Alliance, are now coalition partners in Berlusconi's government.

In May this year, rumours of an abduction of a baby girl by a Gypsy woman in Naples triggered an orgy of violence against Roma camps by thugs wielding iron bars, who torched caravans and drove Gypsies from their slum homes in dozens of assaults, orchestrated by the notoriously violent local mafia, the Camorra. The response of Berlusconi's government? 'That is what happens when Gypsies steal babies,' shrugged Roberto Maroni, Italy's interior minister and a key Berlusconi ally.

For the 10m Europeans all loosely labelled as Roma or Gypsies, life is an endless procession of marginalisation and prejudice. Corralled into settlements across the continent, 84 per cent of Roma in Europe are estimated to live below the poverty line. Perhaps even more shocking is the lack of a more detailed picture. Official indifference and reluctance on the part of the Roma themselves means data on life expectancy, infant mortality, employment and literacy rates are sparse. Yet all are likely to be lower than those of mainstream society.

The plight of the Roma has been a part of European life since their mysterious migration from Rajasthan around 1,000AD. Queen Elizabeth I was the first who sought to expel the Roma from England. German Emperor Karl VI ordered their extermination in 1721. In parts of the Balkans, Roma were traded as slaves until the middle of the 19th century. In the 20th century, hundreds of thousands of Roma perished in the Nazi Holocaust, known in Gypsy folklore as the Porrajmos or 'The Devouring'. How Roma like Cristina and Violetta came to be born in Naples has more to do with the modern legacy of war in the Balkans. In the early Nineties, thousands of Gypsies crossed the Adriatic after the outbreak of fighting in Yugoslavia and ethnic cleansing in Bosnia. For many of the Gypsies, the majority of whom were illegal immigants, lawless Naples was the place where they could disappear into the chaos.

It's 6.30am in the graffiti-strewn centro storico of Old Naples. Two young priests whizz past on an ancient canary-yellow Vespa, the engine putt-putting through the silent streets. Running a red light and skirting the baroque entrance to the chapel of San Lorenzo Maggiore, the seminarians roughly scrape the kerb and abandon the scooter. They are late for morning prayers. Down through the narrow cobblestone streets, far below them, is the harbour and the azure Mediterranean.

Sparkling in the morning sunshine, the waters of the bay stretch west, out towards the dark mass of Vesuvius and Campi Flegrei, the 'burning fields', the volcanic plateau the Greeks once thought were the gates to hell.

Morning comes slowly here. Old men, their wrinkled faces as scorched and cracked as the dry earth, are the first to emerge, setting out white plastic chairs on the narrow streets outside their tenement homes as their wives clatter pans indoors and get on with their morning chores.

Armed with soapy water and sponges, a ragged group of municipal workers sets about removing hundreds of posters that have appeared across the city overnight. 'Diritti per tutti' (Rights for all). 'White, black, yellow, red. Stop apartheid now,' they proclaim beneath crude images of fingerprints. Beneath the new posters lie fading old ones calling for the mass deportation of Naples's Roma Gypsies and immigrants.

'Italy is divided on these girls, on the fate of the Roma. The conscience of the people has been pricked. You can see this on the walls of our city,' says Francesca Saudino, our early morning guide and a campaigning Naples-based lawyer with Osservazione, a nationwide pressure group for Roma rights. 'The reaction to the death of these children goes beyond anything that has happened before. The incident has exposed a long-held social realism in our country: that many working-class people think the Roma no better than animals, and the government is using this xenophobia to win votes and popularity. People are ashamed. The deaths of these girls has come to represent something more, perhaps a battle for Italy's soul.'

We are heading to Scampia, the toughest and most lawless public housing estate in Europe. The taxi driver, reluctantly taking us there, isn't pleased. He is charging us 'treble' and doesn't tire of telling us, spitting out the demand at each traffic light between puffs of his cigarette.

Scampia is home of the infamous public housing towers known as Le Vele (the Sails), the place where Naples's many drug addicts come to score the cheapest high-grade heroin and crack cocaine in the EU. A land of outsiders and lawbreakers living on the fringes of society, the district is also home to the majority of the city's Roma. At the municipal entrance to the estate, with a nod to Dante's Inferno, someone with a canister of red spray paint has written: 'Abandon hope all ye who enter here.'

Our first sight is a string of burnt-out cars. It looks and feels like the Farza district of Kabul. The buildings appear as if they've been beset by a natural disaster. The elevators in most are gone. Broken pipes spew water everywhere and the forecourts are covered with knee-deep garbage. The air outside smells of burning tyres. From the drab high-rise flats, conspicuous lookouts scan the roads for undercover police or special drug enforcement teams. Scampia has long been a key base for the narcotics arm of the Camorra.

Our driver drops us in the middle of Via Cupa Perillo alongside the carcass of a Fiat Punto. It marks the entrance to Campo Autorizzato, Scampia's only official Roma camp - a couple of hundred caravans and prefabs strung on a narrow spit of land overshadowed by the high walls of Naples's notorious Carcere Di Secondigliano prison. It is the place where Cristina and Violetta were born and lived all their lives.

'This is a reclaimed swamp,' says Francesca. 'Some 700 Roma live here without running water, toilets, sewers, garbage disposal or proper heating and cooking facilities.'

As we approach the entrance, children play beside a polluted creek amid excrement spewed by an open-air communal toilet. Standing waiting for us in the centre of the roughshod tarmac road is Miriana Djeordsevic, the mother of the two dead girls. Shrouded in black with thin silk slippers on her feet, she is clutching the last photograph of her dead daughters. The mood around her is tense. In the days since the girls died, Miriana's extended family have been forced to give their fingerprints to the authorities. In recent weeks, Roma groups from here have demonstrated, wearing the black triangles Gypsies were forced to wear in the concentration camps.

Inside Miriana's home, vodka is offered, poured by a tattooed man covered in gold chains and bracelets. Grinning through blackened teeth he offers no introduction. Most of the Roma women from this camp work as day labourers in agriculture, others, the elderly and the children, beg. But some of the men run one of the biggest car theft and stripping-down rackets in southern Italy. Others, living deeper in the shadows, earn their money from selling drugs and violence. Looking around the room it is clear this black economy does not produce wellbeing or health or luxury, only symbols of power, wealth and social advancement among the men. Their half-naked infants and wives look as unhealthy as some women and children in sub-Saharan Africa.

'The girls drowned in the sea,' Miriana tells me firmly. 'There has been talk in the newspapers, lies, that they were murdered, that there was no postmortem. They drowned in the sea, playing like the innocents they were. The real crime was what happened around them. Those people by the water, they ignored the children, like they were dead dogs washed up in the Mediterranean. My daughters were not subhuman.'

Miriana hands me another photograph of Violetta. She is posing in a ruffled pink dress. 'She wanted to be a dancer. She didn't want to go to school. She only wanted to be beautiful. Cristina was a bad influence on Violetta. She didn't like school. She hated living in the camp. Her grandmother said she was just trying to find her place somewhere, but she would've grown into a strong woman. She had the will and the determination. Above all she wanted to be able to walk into the shops in the city, look at the dresses without being chased by the police. She would cut dresses out of magazines and place a cut-out of her head on to them. It was her way of escaping. Violetta just watched. She worshipped her big sister.

'In the days after the girls died a Catholic priest visited us and apologised for the local people on the beach, who he said had misunderstood the situation. I asked him why the Italians hated us, why they looked at the bodies of two dead children and smeared on sun cream and he had no answers. He wept and told me the Roma were still God's children. I told him it doesn't feel like it. We are the ones the Italians blame for the poverty outside the camp. That is their own making, not ours, not my children's fault.'

Miriana is barely 30 but looks a decade older. Married at 14 and a mother of five by her early twenties, she escaped the Bosnian-Serbian border area as a teenager, hoping for a new life in Italy. All three of her surviving children are unschooled. The youngest don't have birth certificates. They simply don't exist and she wants to keep it that away. One of the last things Cristina and Violetta did was to be fingerprinted by the authorities. 'Cristina and Violetta gave their fingerprints shortly before they died. Violetta was upset. She ran away and started crying. She thought the police were coming to take her away. Cristina was angry and scrubbed the ink from her thumb. She understood everything. She knew we were being treated like animals. She died knowing she had no real hope of a better life.'

Later, as we walk around the camp, we are faced down with intimidating glares. One man spits at my feet. The ethnic fingerprinting drive, part of a broader crackdown on Italy's 3.5m recent economic immigrants and carried out in an atmosphere of hysterical rhetoric about crime and security, has left the Roma more bitter than ever. Catholic human rights organisations have damned the fingerprinting of Gypsies as 'evoking painful memories' of the Nazi persecution. The chief rabbi of Rome insisted this week that it 'must be stopped now'. Amos Luzzatto, former head of the Italian Union of Jewish Communities, said that the policy of fingerprinting recalled 'days when I could not go to school, and people would point at me saying: "Look Mummy, it's a Jew." This is a country that has lost its memory.'

But Massimo Barra, head of the Italian Red Cross, which has been monitoring the process, insisted last week that the aim was to integrate Roma people into Italian society. If children were fingerprinted, it would be done 'as a game', he said. 'We are building bridges, not walls.'

Officially, the reasons for the fingerprinting programme appear simple enough: to allow the government to compile accurate census data and ensure that Gypsy children go to school. But human rights groups are concerned. As part of sweeping anti-immigration measures the prime minister has also appointed special commissioners to 'deal' with Gypsies in the three major Italian cities - Naples, Milan and Rome.

According to Francesca Saudino, fingerprinting lies at the heart of the anguish and disenchantment felt by the Roma. 'The Italian right blames much of the country's street crime on the Roma, in particular on children sent out by adults to rob and steal,' she said. 'This is an hysterical inaccuracy. There are an estimated 152,000 Roma in 700 camps across Italy and the Interior Ministry hopes to dismantle them all. Thirty per cent have Italian citizenship, but the rest are immigrants, many from Romania and the Balkans. We suspect that the Gypsies are being identified only so that they can be expelled.'

She added: 'A third of Neapolitan children don't go to school at all or have to repeat years. Illiteracy here is at Third World levels. The children who live on the outskirts of Naples, in the Spanish quarters and in Piscinola, San Giovanni a Teduccio, Poggioreale, Secondigliano and Torre del Greco, they are all the same, they hate school, their teachers and the selectivity of the system. They hate Italy and the Italians, too. Many are the children of Russian immigrants, but they are not fingerprinted or treated as outlaws. You cannot have one law for the Roma and one law for everyone else.'

At the core of the issue, according to human rights groups, are several key politicians. One of them is Umberto Bossi, head of the Northern League, a small party of restyled former Fascists, anti-immigrant forces and traditional conservatives. Bossi has emerged as Italy's kingmaker, the power player who was key in returning Silvio Berlusconi to office in the recent elections and who many believe will continue to call the shots. Bossi and three other members of his party were given choice seats in the new cabinet, including control of the Interior Ministry, which oversees police and most domestic security. Bossi is a man who once advocated shooting at boats bringing immigrants to Italy's shores.

The Northern League emerged in the early Nineties as a party advocating the secession of Italy's wealthier north from the rest of the country. The party these days has toned down the secession rhetoric. Instead, it campaigns for more autonomy and 'devolution' of central government powers to regional authorities. Bossi was named Minister for Reforms in the new government, an ideal platform for changing the law to give more autonomy to the north.

Another cabinet post went to the Northern League's colourful Roberto Calderoli, best remembered for appearing on TV in a T-shirt emblazoned with a cartoon of the Prophet Muhammad, and for planning to parade pigs on land where Muslims were attempting to build mosques. Berlusconi's other main partner in government is the National Alliance, a party formed as a successor to Mussolini's Fascists. Its leader, Gianfranco Fini, who has struggled to distance himself from his neofascist past, became speaker of the lower chamber of parliament.

Yet Giuliano Ferrara, formerly Berlusconi's media spokesman and now a prominent editor and TV pundit, claims the rise of the right is a myth. 'It was entirely predictable that once Berlusconi returned to power a Greek chorus would appear to warn us all that Italian democracy is in danger, that Italy is introducing mass deportations and concentration camps,' he said. 'In reality, violence against immigrants and Gypsies has been limited.' The true problem, Ferrara says, is that Italy, more than any other country in Europe, has had to cope with an influx of immigrants who end up living in poverty on the edges of cities - the very margins in which Italy's own poorest people live. 'There is no ethnic persecution in Italy,' Ferrara insists. 'To draw broad comparisons with what happened to the Jews, who were exterminated, is irresponsible.'

Ironically, Europe is supposedly in the middle of a 'Decade of Roma Inclusion', a €30bn project launched by the EU in 2005 when the governments of the countries with the largest Roma populations - Bulgaria, Croatia, Czech Republic, Hungary, Macedonia, Montenegro, Romania, Serbia and Slovakia - agreed to close the gap in education, employment, health and housing. Ask the Gypsies themselves and they will tell you it has had little effect on their lives. As the Open Society Institute, funded by billionaire George Soros, who has widely supported the Roma, said in a recent report, most governments see the answer to the Roma problem in terms of 'sporadic measures' rather than coherent policies. When asked what lay at the heart of the problem, one MEP said: 'Look. We want to help them. We don't lack the laws and we don't lack the money. The problem is political will in countries like Italy and, ultimately, the Roma themselves - many don't want to be part of society, even if society is trying to help them. There is no trust, only bitterness and scepticism. In the case of Italy, it is on both sides.'

'My name is Veronica Selimovic and I am Italian,' cries the barefoot Gypsy child as she skips nimbly through mud and oil-slicked puddles at Camp Nomadi Aurelia on the outskirts of Rome. Young men stand among graveyards of wrecked cars and rusting bodywork, smoking smuggled cigarettes. All around us are burnt tyres, cartridge cases, condoms. The Gypsies are restless. They look prepared to leave in the dead of night; they claim it is with good reason. The political figure now presiding over their camp is the National Alliance's Gianni Alemanno, who was elected mayor of Rome in April. As he took office his supporters gave the Fascist salute, chanting 'Duce, Duce'.

Clutching a black and white photograph of her father, 60-year-old Satka Selimovic's glaucomic eyes water and droop as she recalls her life on the fringes of Italian society. 'I was born in Italy, on the outskirts of Venice, after the Second World War. My family thought life would offer us a second chance. I told this to my own children, that life would turn out to be better and they say this to my granddaughter, Veronica. People may say we are bitter and to blame for our own isolation, but we tell each new generation of Roma they will be included and accepted and each time it feels like a betrayal.'