This doesn't seem to be a place wracked by decay. It is just after one o'clock on the rear terrace of the Restaurante La Concepción, and the young women at the next table are laughing through one of those lunches that seem destined to ebb into dinnertime, their heads only marginally obscuring the view of the twinkling waters in the harbour below. As they clink their wine glasses, the head waiter approaches me from the right. He smiles politely as he places the day's special – a deep-sea grouper risotto with blueberry sauce – on to the table, and leaves me to the vista.

It was not meant to be like this. Not in the port that was condemned to rot. It is exactly a century now since Valparaíso became an undead city, its prime reason for existence ripped from it by the tides of change. Where, I begin to wonder, is the doom and gloom?

A little context. For most of the 19th century, Valparaíso was the dominant port on Chile's western flank – a crucial stop-off point for any vessel attempting the long, dangerous voyage from the Pacific to the Atlantic around the treacherous foot of South America. Founded by European settlers in 1536, it really began to develop in the wake of the bitter divorce from Spain in 1818, when Chile's fledgling navy, needing a base, found one on this natural bay, roughly halfway up the country's 4,000 miles of coastline.

Before long, Valparaíso was one of the planet's economic boom towns, awash with boats, sailors and the jingle of international commerce. It was even a beneficiary of the California Gold Rush in the 1840s and 1850s, as a refuge on the route north for those seeking their fortunes in the US.

But then came the Panama Canal, gouging a 48-mile path through the narrow barrier of Central America – rewiring the planet's shipping lanes at its very moment of opening in August 1914. At a stroke, Valparaíso lost everything – the traders, the maritime traffic, the flurry of people around its docks and in its cafés. It slipped away into obscurity, dead yet alive, no longer a global hub; an outpost whose glory years were but a silent memory.

Street art (AFP/Getty)

Although Valparaíso still hasn't recaptured those golden decades, they cry out from the buildings and landmarks dotted near the waterfront. Rather weary and tattered in places, they are remnants of a season in the sun nonetheless – the noble bulk of the city's stock exchange, founded in 1898 and still situated on Calle Prat; the broad drag of Avenida Argentina, which was laid in 1912, two years before the sky clouded; the wide Plaza Victoria; the grand Hotel Reina Victoria, a perfectly pink edifice on Plaza Sotomayor, finished just in time to salute the British queen in question, in 1902.

If there is a sadness to these elegant echoes, it is offset by the beauty of what surrounds it – the city rearing sharply upwards in a blur of bright colours and unlikely angles. In many ways, Valparaíso is a ludicrous construction, stretched out across 42 incredibly steep hills – so that some of its upper areas hang precariously above the docks, stacked in higgledy-piggledy fashion. Earthquakes shook its foundations in 1730, 1822 and 1906, and a terrible fire scorched through some of its outer districts as recently as April, with the loss of 2,500 homes – the number being an indication of how closely clustered some parts of the city have become.

Yet Valparaíso is also a survivor. And there is a definite thrill to exploring its improbable lay-out using the antique funiculars that conquer its gradients – more than 25 of them link the seafront to loftier quarters (even if only a handful are currently in operation). I opt for Ascensor Concepción, which connects Calle Prat to Cerro Concepción (Conception Hill), holding my breath as this 1883 relic clanks and wheezes to the summit on its rickety rails.

Here are further ghosts. Restaurante La Concepción, with its local seafood, is a Chilean exception to an Anglo-Saxon rule; the hill is a Little England, left by the merchants who made hay here in the good times. The Iglesia de St Paul, an Anglican nugget of stained glass and piety, built in 1858, could have escaped from a Sussex village, and Hotel Brighton is the most incongruous of names for a retreat that gazes at so Latin a panorama.

This trend continues. In October, British artist Charles Uzzell-Edwards (who paints under the moniker "Pure Evil") daubed a mural – Poema de Amor a Valparaíso (Love Poem to Valparaíso) – along a wall on the Cerro Concepción promenade of Paseo Atkinson. Art has been Valparaíso's post-Panama outlet – from the flowerings of graffiti which seem to coat every available space (operators such as Valpo Street Art offer tours of some of the more stylish flourishes) to splendid museums. The Museo de Bellas Artes, atop Cerro Alegre, contains crucial shards of Chilean art, including pieces by Valenzuela Puelma and Camilo Mori – both born in the city in the glow of the 19th century. Another of the key works, Alfredo Helsby's El Paseo Atkinson, shows the titular street on a summer day in 1896.

The cultural mother lode perches on Cerro Florida. La Sebastiana was one of three homes once owned by Pablo Neruda, a nautical-themed bolthole where maps still adorn the top-floor study. Chile's greatest poet would spend New Year here, sitting in a leather armchair in the lounge, using the glimpses of the Pacific provided by the windows as inspiration. Staring in the same direction, at Valparaíso smeared across the lumpy landscape, I can understand why he so loved the city. Being undead can never have appeared so attractive.

Getting there

Valparaíso is 70 miles north-west of Chile's capital, Santiago. KLM (020 7660 0293; klm.com) flies to Santiago from many UK airports via Amsterdam. TAM (0800 026 0728; tam.com.br) flies from Heathrow via Sao Paulo. Via Madrid, Iberia (020 3684 3774; iberia.com) flies from Heathrow and Air Europa (0871 423 0717; aireuropa.com) from Gatwick.

Staying there

Hotel Brighton (00 56 32 259 8802; brighton.cl) has doubles from 43,697 Chilean Pesos (£46), with breakfast. Hotel Reina Victoria (00 56 32 221 8476; hotelreinavictoriaValparaíso.cl) has doubles from CP28,000 (£29), with breakfast.

Visiting there

La Sebastiana (00 56 32 225 6606; fundacionneruda.org). Open 10.30am-6.50pm daily except Monday; CP5,000 (£5.20).

Museo de Bellas Artes de Valparaíso (00 56 32 225 2332; museobaburizza.cl). Open 10.30am-7pm daily except Monday; CP2,000 (£2.10).

Valpo Street Art (00 56 32 312 3014; valpostreetart.com) offers private walking tours of graffiti sites for CP15,000 (£5.50).

Touring there

Last Frontiers (01296 653 000; lastfrontiers.com) has an 11-day tour, Southern Chile: Lakes, Glaciers and Towering Peaks, which calls at Valparaíso. From £2,875 a head, with flights. Journey Latin America's 15-day Vineyards of Chile and Argentina also visits the city (020 3393 7229; journeylatinamerica.co.uk). From £4,685 a head, without flights.