In 2002 I took part in a Norwegian book club poll of 100 authors from all over the world to find the "best and most central works in world literature". Don Quixote was first of the selected 100 books, with 50% more votes than any other book. Was the novel selected because the writers felt a primitive love and attachment to the story and characters, or were they making a historical judgment about its importance as the first real novel?

The British television director, Mike Dibb, made a wonderful documentary in 1995 about the pervasive presence of the Don in modern life, from kitsch to high culture, from kitchen tiles to Picasso. Readers' reviews on Amazon of previous translations include accounts of transforming reading experiences and tributes to the life and warmth of the tale. There are also cavils and grumbles about narrowness and repetitions. Edith Grossman's new and fluent translation gives us another chance to think about the book's persisting life.

Part of its technical charm for writers is the way in which it is the ancestor both of realism and of very modern self-conscious metafictions. Don Quixote and Sancho Panza grow more real as they suffer and discuss. They have real bodies in a real landscape and an almost-real society. Once you have met them you can never forget them. Any discussion of the invention of character in prose fiction radiates round Cervantes. Dickens, Dostoevsky and Balzac would not have written as they did without him.

But writers both before and after modernism have been excited by the way Don Quixote mediates between many ways of storytelling. The comic realist tale is played against the high chivalric vision and mediaeval romantic forms - and feelings. The novel includes inserted sentimental novellas, and develops a peculiar self-consciousness in the second part, as Quixote and Panza bump into people who know them intimately because they have read the first part. There is also play with an unauthorised second part, which did appear, to Cervantes' irritation, which his characters have also read, and seek to refute.

In the second part there are several characters who are bent on having 17th-century fun by staging romantic episodes for Quixote to take part in, to amuse themselves - lovelorn maidens, false knights, fake enchantments. The knight becomes the victim of others' plotting - and the reader is both uneasy and glad at the end when the invented "author", Cid Hamete, is described as thinking that the "deceivers were as mad as the deceived and that the duke and duchess came very close to seeming like fools, since they went to such lengths to deceive two fools..."

The power of the novel (and of all novels, but most particularly of this one) lies in the need to imagine people and things that don't exist. In that sense Quixote's desire for the world to be a place of extreme adventures, concerned with high moral virtues and chaste sexual passion, is a version of every human need to make the world more real and more meaningful through the unrealities of art. Cervantes' peculiar skill lies in the way in which he delightfully confuses his own readers by writing about enchanted windmills and wineskins, magic helmets and barbers' basins. We have all used the equivalent of a basin to turn ourselves into a character in a tale.

The interplay between this unreality and the imaginary reality of the world Quixote travels through depends on the rendering of the solidity of master and servant - Quixote's "sorrowful face", his broken teeth, his dirty chamois underwear and even Sancho Panza's stink when he is driven to relieve himself while standing on guard beside the knight at arms. The mind wanders freely, the body gets battered. Until Panza finds a way to disenchant Dulcinea by simulating the lashing of his own body by lashing saplings in the dark.

Nabokov, famously, came to hate the novel because of the cruelty of the world in which it was set - the remorseless beatings of Sancho and Quixote, the children putting furze under the horses' tails to drive them wild. He thought Cervantes shared his age's indifference to suffering, and indeed a modern reader reacts differently to japes and humiliations.

Dostoevsky, on the other hand, made a subtle identification of the Don's battered, patient, sorrowful countenance with Christ himself, despised and rejected of men. He said Quixote was the most perfect attempt in Western literature to represent a "positively beautiful man". He added that "he is beautiful only because he is ridiculous", and went on to say that his nearest rival was Mr Pickwick, "weaker as a creative idea but still gigantic". The human way to present goodness and beauty, Dostoevsky thought, was through humour - arousing compassion by ridicule. Out of his perception of Quixote came his idea for the character of Prince Myshkin in The Idiot who, like Quixote, does a lot of damage through pure idealism. This tells us something about the hybrid comic nature of the novel in general.

Kafka, in his parable, The Truth About Sancho Panza combines an understanding of the riddle about reality and unreality with an understanding about those wandering pairs in western literature - Prince Hal and Falstaff, Faust and Mephistopheles, Diderot's Jacques le Fataliste and his master. All of them are aspects of an internal dialogue inside one man: idealism against scepticism, honour against expediency, this world against a hypothetical other world, heaven or the golden age. Kafka's Panza fed his "demon" on romantic tales, called him Quixote and loosed him into the world, where his exploits - which would have hurt him had he stayed inside Panza - "harmed no one" and could be observed with pleasure. Another use of Cervantes' archetypes to make a subtle definition of the uses of art.

In terms of self-conscious fiction, the most perfect of all is Jorge Luis Borges's Pierre Menard, Author of the Quixote, which uses and adds to the conceit of the text within, and the text seen through, by having Menard create a modern Quixote, set in the 20th century. His story is identical word for word, but they are all now 20th-century words with 20th-century meanings. This is a riddle about writing and reading.

Quixote's death is moving because it is the end of storytelling, as well as of a life force. Those who have tricked him into homecoming try to bring him to life by reigniting his fantasy with news of Dulcinea. His resolute, even irritable, refusal to re-enter his imaginary world or to resume his chivalric identity have a wonderful combination of dignity (for the man) and real loss (for his friends and the reader). It is a new twist in the tension between the real and the imagined.

Edith Grossman's translation has been described as a masterpiece. It has energy and clarity, and she has invented a robust style which is neither modern nor ancient. There are some infelicities. She has a recurrent habit of making the Don confound the second and third persons - thou thinketh, he thinkest - which seems implausible on the surface as he knew the chivalric language by heart. I thought she might be using the device to represent some other error in his speeches.

I have checked with Spanish scholars and writers and they say that Quixote makes no such error, and that, at least in the passages I showed them, it is introduced where he is speaking eloquently and well. The translation does not make a reader stop to think about stylistic felicities, or word play, or levels of incongruity, and I suspect there has been a loss there, partly inevitable. But it is readable - it does not constantly draw attention to itself as translation - and the rhythm of the telling is compelling.