Ang Lee was determined to make his new film about Chinese espionage as frank as he could - but he did have to look away during the sex scenes. He talks to Geoffrey Macnab

Sometimes people plan their holidays around movies. Harry Potter obsessives try to track the locations populated by the teenage wizards. New Zealand sold itself to holidaymakers on the back of The Lord of the Rings. Hong Kong though, found a burgeoning market in cinematic sex tourism earlier this year, thanks to an arthouse film director.

Ang Lee's latest movie, Lust, Caution, was released in China in an expurgated print, with its very graphic sex scenes removed. In Hong Kong, however, they remained, and Chinese film-lovers made the trek to the city to see the film as the director intended. It was a rapturously received smash in Hong Kong (and Taiwan).

The story of a group of young dissidents in 30s and 40s China hatching a plot to kill a brutal politician, Lust, Caution might have been expected to bowl over audiences in the US, too. After all, Americans are used to sex on screen, and Lee's previous film, Brokeback Mountain, had been a critical hit in the States. This time, though, they've been lukewarm, and the movie has taken just $4.2m (£2.1m) at the US box office. Lee, though, had foreseen the problems Americans might have with it.

The sex wasn't the problem. If anything, the destructive and violent love affair between student actor Wong Chia Chi (newcomer Tang Wei) and the politician Yee (Tony Leung) was the movie's main selling point, even if those scenes attracted the dreaded NC-17 certificate - a rating that scares off multiplexes. What American audiences really seemed to struggle with was the slow-burn narrative style, the near three-hour running time, and the probing, painstaking way in which it explored aspects of recent Chinese social and political history.

I meet Lee in the ballroom of an old Venetian hotel. In late afternoon, the room is dark and shadowy. It makes a suitable backdrop for a discussion of a film as ambiguous and unsettling as Lust, Caution. The Taiwanese director is unapologetic about his film. "The pacing relates to the information that is given," he says. "We Chinese need to go back to the world we used to live in.

"It's a lot of fun for the Chinese to watch the first half, to remind us of our innocence and how things used to be. Then comes the real deal. But for non-Chinese, you don't get that benefit. I am sure the Chinese viewer will have a blast, but when the western viewer reads subtitles, it is very frustrating. You have that feeling: what the hell is going on. But I had to make the movie right for myself and for the Chinese audience."

A complex espionage thriller set in Shanghai and Hong Kong during the late 1930s and early 40s, Lust, Caution is not - at least to American eyes - a crowdpleaser in the vein of Lee's Crouching Tiger, Hidden Dragon. Instead of gravity-defying martial artistry, it consists mainly of characters talking. When there is violence - for example, when the students try to assassinate a man who has a Rasputin-like aversion to dying - it is realistic and dismaying. When they plunge a knife in the man's stomach, it bounces out.

And, like the violence, the sex is dealt with equally frankly. "They [historians] tell you about the glorious war, the fight. They don't tell you that it is very hard to kill someone. They tell you that the women spies seduced the men and killed them. They don't tell you about the sex." Lee laughs wearily as he explains his attempts in the film to look behind the official stories about Japanese occupation of Shanghai. Just as he did in Brokeback Mountain (when adapting Annie Proulx's story for the screen), Lee has taken a short piece of fiction and has fleshed it out, giving it an epic quality. Lust, Caution is based on a 28-page story by Eileen Chang. "She writes about women's sexuality and feeling for love during the most macho war we have had. It is like - how dare she!" Lee says. "It is very gutsy work. That triggers me to investigate my own upbringing and patriotism."

It quickly becomes apparent, for Lee himself, how personal and even autobiographical Lust, Caution is. For example, Yee's very specific gait is based on that of Lee's father. The director admits to a close identification with the spy played by Tang Wei, too. "When we were doing the movie, I used to joke that I carry the head and purity of the idealistic student Kuang Yu Min, the heart of Wong Chia Chi and the balls of Mr Yee," Lee says.

He then adds that Tony Leung has projected aspects of Lee's own character into Yee. A curious remark, certainly, given that Yee isn't a remotely sympathetic character. He is a quisling, collaborating with the Japanese and overseeing the torture and killing of Chinese rebels. Then again, it is Yee's personal and sexual life that intrigues him. "I desire it but I cannot do it. I make it into a movie. He projects a lot of that part of myself. It is a romance I never really experienced that I was longing for. It is almost like a dream."

Like the students, whose high-minded ideals are shaken when they get their hands dirty with plotting and assassination, Lee acknowledges that he has been "shocked by reality, naive in some ways, not really knowing what to do in an adult world, like a big kid".

As for Wong, he identifies with her because: "it seems that only by pretending, by getting far away from reality, she can reach her true self ... to touch the real you that you try to cover up."

Meanwhile, Lee relished the chance to recreate his parents' era and their way of thinking. His preparation was exhaustive. For instance, he and his casting directors saw 10,000 actors before finally choosing Tang Wei. Actor Tony Leung testifies that Lee was a ferociously demanding director: always asking for that little bit more, the different way to do the scene, the extra detail. The scenes that were the hardest to shoot were, inevitably, the sex scenes.

The director admits that he felt extremely uncomfortable filming them. He was conscious that he was first engineering some extremely raw and intimate moments, and then intruding on them. "For this project, I had to strip down and get to the heart of the darkness in some way," he says. His instinct, he says, as he filmed Leung and Tang Wei making love was to look the other way. "I don't make pornography, so when you get down to that, it is very painful to shoot. You fight with your moral sense. You are deeply confused. It is embarrassing to coach the actors through it - to verbalise and to give indications. You are revealing your secrets when you are shooting like that." The sex scenes were shot on a closed set with only four people present - the couple, the director and the cinematographer.

Lee defends the sex scenes as being utterly integral to the film. Yes, it is inevitable that the scandal surrounding these scenes will dominate discussion of the movie. "That bothers me. It gives me sleepless nights." He and his collaborators have done their utmost to make the best film they can and all the journalists want to talk about is the sex.

At a press conference earlier in the day, he had fielded the sex questions patiently enough. Did they really do it? To Lee, that isn't the right question. What is important is that the audience has to believe in the scenes. Look at the eyes, not the bodies.

In the end, though, Lee's real preoccupation isn't the sex. Nor is it the politics. Nor is it the chance to bring back to life an era in Chinese history that is in danger of being forgotten. Like Brokeback Mountain, it is an emotionally charged story of a forbidden love. Lust, Caution may begin as an espionage thriller in which the politics and social history are foregrounded. By the final reel, though, it has turned into a full-blown weepie. At its core, this is a film about romantic obsession - "doomed, impossible romantic love".

The middle-aged director, who is happily married, grounded and emotionally stable, just can't help but be drawn to tales of amour fou. "After Brokeback and this one, I do believe deeply inside that I am a romantic," Lee admits. "I was never romantic in real life. That is why I have to make movies about it."

· Lust, Caution is released on January 4