The latest novel of Germany's hot young writer Thor Kunkel exposes the Nazis' previously unknown trade in pornographic films. Sounds like a guaranteed bestseller. So why has the book's publisher cancelled it and kicked up a literary storm? Luke Harding investigates

He is one of Germany's hottest young novelists. And, until last week, few in Germany's literary world doubted that Thor Kunkel's latest novel, Final Stage, was going to be anything but a rip-roaring success. The novel had all the right ingredients - sex, a lot of sex, Nazis, more Nazis, and a spectacular romantic finale. Furthermore, the book was based on original research carried out by Kunkel into one of the Third Reich's best-kept secrets - a series of pornographic films shot by the Nazis in the woods around Hamburg.

Last week, however, Kunkel returned from a holiday in Amsterdam to discover that his publishing house had abruptly decided to cancel his novel two months before its scheduled release. Kunkel's publisher, Alexander Fest, said that he had shelved the novel at the last minute because of what he said were "aesthetic" and "content" differences with its feted 40-year-old author.

Fest did not elaborate. The affair has dominated the literary pages of Germany's broadsheets for more than a week, with most observers believing that Kunkel's real crime was something else - he had made the characters in the novel, who work for a fictional SS Hygiene Institute in Berlin, appear far too glamorous. And he had downplayed the Holocaust.

"This is totally ridiculous. It's outrageous," says Kunkel, whose debut novel, The Black Light Terrarium, won the Ernst-Willner, one of Germany's top literary prizes. "What I've tried to do in my book is modernise one of the darkest chapters in German history. My novel takes place in 1941 when not a single bomb was falling on Germany. It starts at the turning point in the war, when Germany invaded Russia. The book is about the morbid leisure society of the Third Reich. It's not that I'm trying to ignore the Holocaust, it's merely that it's totally passé as a theme. Who does Fest think he is?"

Before submitting his manuscript to his publisher last summer, Kunkel had researched long and hard into one of the most subterranean aspects of the Nazi era - a series of erotic home movies known as the Sachsenwald films, shot secretly in 1941. Officially, pornography was forbidden under the Nazis; in reality, however, the films were not only screened privately for the amusement of senior Nazi figures, but were also traded in north Africa for insect repellent and other commodities.

Kunkel discovered two of the black and white films - the pastoral Desire in the Woods and The Trapper. In one of them, a man ties a naked woman to a tree. Incredibly, Kunkel tracked down the actress some 60 years after her woodland nude scene, living in an old people's home outside Hamburg. "I found her via a photographer who had known her since she was 14, when she posed for nude photographs," Kunkel says.

The 83-year-old was slightly taken aback by the novelist's visit, but agreed to help. She could recall only two "polite, charming men" who approached her outside a tobacconist's kiosk in Berlin. The men had driven her and her sister in a black Opel Admiral - the saloon car favoured by the Gestapo - to the woods outside Hamburg. There she had disrobed.

"She told me she and her sister had had a threesome with a man. I found this a bit surprising," Kunkel says. The novelist never did discover who the director of the film was, but he used the movies as the framework for his 622-page manuscript, which his publisher, Rowohlt, had originally lauded as a "packed, minutely researched portrait of morbid Nazi society ... and the demise of the Third Reich."

Kunkel also interviewed 57 elderly German soldiers who had served with Erwin Rommel in north Africa, where much of the novel is set. They confirmed what he already suspected - that during the second world war, the German military traded Nazi pornography with the locals. The Sachsenwald films even ended up in the hands of the Bey of Tunis, a regent with a legendary collection of pornography. "It was the thing the locals were most interested in. In return, the soldiers got food, water and supplies," Kunkel says.

So far, the row over Rowohlt's decision to axe Kunkel's book appears to have done him no harm. Three other publishers have offered to take on Final Stage, while Kunkel has been the subject of sympathetic pieces in the literary sections of the German press. In a long essay, the Frankfurter Allgemeine Zeitung said the novel ought to have been "the book of the season". The unpublished manuscript was full of "Tarantino-esque gruesomeness", as well as "decadence, lust, chemical pleasures, bodily joys, bodily revulsion and humour". It needed editing, but should be published, the newspaper said.

Other literary editors, however, have passed less flattering judgment. "He's read too much Thomas Pynchon and has overestimated his artistic possibilities," one grumbled. He added: "There are several other German writers from his generation who are a lot better. Kunkel is an author who has a great desire to provoke."

Meanwhile, the row escalated even further when Der Spiegel printed private emails from Kunkel's former editor. The editor, Ulrike Schieder, complained that Kunkel had depicted the allies as "bloodthirsty animals" and the Germans as the second world war's "sole victims". The book was "pure revisionism" and trivialised the Nazis by portraying them as little more than a "leisure society," the magazine said. Kunkel reacted furiously. In an open letter, he accused Der Spiegel of trying to "murder my reputation". He said that "like any half-sensible person" he condemned the horrors of the Nazi era, especially the Holocaust.

Kunkel says none of the problems surrounding his book would have arisen if it had been published in Britain or America, rather than in Germany. "I'm an Anglophile German. The problem is that a lot of my writing exhibits black humour. Fest doesn't appear to share my sense of humour."

Born in Frankfurt in 1963, Kunkel spent five years in the late 80s working as an advertising copywriter in London, before moving to Holland for a decade, and then to Berlin. The Black Light Terrarium, published in 2000, about the drug-fuelled world of a 19-year-old parking attendant, was an instant success. Kunkel compares himself to Will Self. "Of course the Nazi regime in Germany should never be forgotten, but we need new angles," he says. He had "worked like an idiot" on his new novel and the decision to axe it had left him "on the brink of a nervous breakdown".

Friends of Fest, meanwhile, have pointed out that the 44-year-old publisher has a good reputation - and that his stable includes heavyweights such as Jonathan Franzen and Jeffrey Eugenides. "The problem is that there was nothing in Kunkel's book worth saving," one friend says. Either way, the saga appears to confirm that there is no such thing as bad publicity. Kunkel has already acquired a new publisher, Eichborn Berlin; his novel will now appear in April.