It was one of those moments when you wish the ground would open up beneath your feet. The strikers outside the Hotel Maria Cristina in San Sebastian were in socialist heaven - the sun was shining and the stars in town for the film festival were having to make their own beds while the chambermaids outside feasted on trays of homemade pintxos, Basque tapas, and drank from flagons of fizzy txakoli brought to them by their supporters. A samba beat was being hammered out on the picnic tables of the picket line and rumours were flying that Sean Penn was about to join them in solidarity with their protest at not being paid the agreed national wage increase by the hotel's new American owners.

One of the strikers spotted Peter Dinklage standing on the steps of the hotel, nonchalantly puffing on a cigarette. The striker had clearly been among the audience the night before that had given The Station Agent, and Dinklage's performance in particular, a four-minute standing ovation.

"Viva el enano!" he cried "Viva the dwarf!" It started up a chant along the picket line that died as quickly as it started. Dinklage, who had grown a scroggy beard since the film was made, didn't move a muscle. I blanched.

It is from the comic tension and the poignancy of such moments of excruciating embarrassment, which follow misfired gestures of friendship, that The Station Agent, is formed. As it happened, Dinklage - who speaks good Spanish - was too preoccupied with a near-death hangover to care. Short, dark and handsome, with eyes that can hold any room he enters, and a voice that starts several metres beneath his feet, he is already assured of a place in Hollywood history as the first actor to play a dwarf as a rounded human being.

It's true, the precedents were not all that great. Outside of Mini-Me, Wee Man from Jackass and the Oompah Loompahs, it's been pretty thin pickings for actors of restricted growth. You may even have seen Dinklage push the popular envelope a little further with a memorable turn in the Christmas film Elf as the snobbish, twisted author - a tad close to the evil dwarves of lore perhaps, but still better than wearing stick-on ears and stripy tights.

But in The Station Agent, Dinklage leaves the last, trailing echoes of the freak show behind to play the romantic lead. I know what you are thinking - not even Tom Cruise is that small. But Dinklage not only gets the girl, he gets two of them - including the Aphrodite of teen TV, Michelle Williams from Dawson's Creek. What is more, you believe it.

But that is the least of the miracles of acting Dinklage is asked to carry off. For the dwarf he plays, Finbar McBride, is an extraordinarily boring man, in only the way slightly anal trainspotters prematurely set in their ways can be. McBride is the kind of guy who prefers the company of an Amtrak timetable to a human any day. He is permanently monosyllabic unless the subject happens to be narrow-gauge North American railways, and he never uses a word where a silent, dismissive glare would do.

His dullness is the genius of debut director Tom McCarthy's script. Yet from the moment this silent stranger - a sawn-off Clint Eastwood if you like - walks into a hick New Jersey hamlet, the one thing its lonely inhabitants cannot grasp is that he wants to be alone. Anonymity is not an option when you're a dwarf, even a reclusive one. Blinded by his dwarfism, they see in the steely drollness he uses to ward them off the wisdom of the fabled wise dwarf - so they keep coming back to annoy him.

It's a deep cultural stereotype Dinklage deals with every day. "Dwarves are either all-knowing sages, fools or Frodo - but basically we come in two categories, the pure or the fool. This is the first time that someone of my height has been a lead in a movie, and a romantic lead at that. It is crazy to think it has never been done before. I don't like getting on a soapbox, I am not a spokesperson for any of this, I am just an actor - but it is kind of curious."

The D-word is not an issue for Dinklage. Although some born with dwarfism are uncomfortable with the term, Dinklage, like many younger people, prefers it. "I hate all that 'little person' shit. Call me a midget, but just be real. I am all for correct terms, but please don't tiptoe around feelings. Don't be too careful, because that shuts you off from people."

The day we spoke I wrote a short piece for the Guardian about how the film had reaped a sheaf of awards from almost every festival at which it had been shown; three at Sundance and two from San Sebastian. (A Bafta for best original screenplay has since been added as well as a top-three place in the US critics' films of the year poll.) Unfortunately, Dinklage was described not as a dwarf in the published article but a "little person", a change made with the best intentions by a subeditor worried about causing offence.

It is precisely this kind of tiptoeing that makes Dinklage cringe and which The Station Agent neatly satirises. Even well-meaning enterprises can fall foul of this fine line, as has happened so disastrously with Tiptoes, another new film in which Gary Oldman adds to his own cabinet of cinematic curiosities by playing a dwarf. Even another scene-stealing performance from Dinklage could not save it from being clod-hoppingly preachy and PC. Its director Matthew Bright is so furious about the finished film, having been eased out by the producers after shooting ended, that he publicly distanced himself from it at its Sundance premiere last year.

McCarthy said he was acutely aware of the dangers of schmaltz from the start. He believes it was because he did not write Dinklage's character as a dwarf at first that they avoided all the politically correct pitfalls. "Peter and I are old friends; he played Tom Thumb, the showman PT Barnum's verbose, maniacal dwarf sidekick, in a play of mine called The Killing Act. Only later when we were looking around for an actor who could hold up such a complex character did we think of Peter, and we thought, 'I guess he'll have to be a dwarf then.' "

Much does indeed rest on Dinklage's performance as a man of few words thrust unexpectedly into the role of reluctant small town celebrity. And the scene in which he is persuaded to go to the local school to tell the children what his life as a 4ft 6in adult is like is a classic of cringe-inducing hilarity. But ultimately, The Station Agent is less a film about dwarfism than an ensemble piece about three lonely people struggling to find a kind of connection. In fact, its central relationship is a twist on the Odd Couple - a man who cannot stop talking finding friendship with a man who never speaks.

Talking to Dinklage and Bobby Canna-vale, who plays a Cuban fast-food vendor desperate to befriend him, is a little like interviewing an old married couple. They finish each other's sentences, and the bond that formed over the three years in which McCarthy periodically developed the script with them in his apartment was cemented on the 20-day shoot, where they drank beer and smoked long into the night on their motel balcony. One particularly drunken night they even had a wrestle.

On screen there's definite telepathy going on, something that must have been helped by the years the cast spent working together in fringe theatre in New York. "We improvised a lot," McCarthy said. "If there was a problem, which sometimes there was with the script, we just went with it. We didn't have much time, and we had no money [the film cost $500,000], but we knew each other so well that we could just risk going out there." Hardly surprising then that the trio of Dinklage, Cannavale and Patricia Clarkson, who plays a depressed painter whose attentions they vie for, have done so well at a string of acting awards ceremonies.

For McCarthy, though, the real kick has been the reaction of the dwarf community to the film. "A woman from the Little People of America came up to me after one screening and was just delighted that we said it, that we got the word out there [dwarf], and got it out of the way. And she was a shrink -" "No pun intended," Dinklage interjects. "Seriously," McCarthy adds, "we are dealing with such a small group of people here -" Dinklage again interrupts - "I mean it's very rare, and what people don't see much of they are slightly unsure of ... "

In fact, is not uncommon for little people themselves to be "freaked" when they see another dwarf for the first time, Dinklage discloses. "People have the strangest ideas about dwarves. I met a guy last year in a bar, he was a friend of a friend and he was pretty toasty, and he said, 'Dude, I was so scared of midgets, man. But you're cool - you're a guy, let's hang out!"

"So I put my face right up next to his and said, 'This is your nightmare. I will see you tonight. When you wake, I'll be sitting at the end of your bed.'"

· The Station Agent is released on March 26.