The drama surrounding the new production of My Fair Lady at Britain's Royal National Theatre would make a terrific musical. It's a twisting tale with all the ingredients for a ripping three-acter.

Act One: The Controversy. The National's artistic director Trevor Nunn announces that his publicly funded ($18.5 million this year) theater will present an all-star revival of Alan Jay Lerner and Frederick Loewe's classic 1956 musical in collaboration with heavyweight commercial producer Cameron Mackintosh (the architect of Nunn-directed hits like Cats). The deal is that Mackintosh will be co-producer in return for the right to transfer the show — in the highly likely event that it succeeds — to the West End and, it is rumored, Broadway.

The battle-lines are drawn across London's theatrical community. "Of course the National should not be doing this," gripes a leading commercial producer who prefers to remain nameless. The National should be using its grant on financially risky musicals — as the Nunn/Mackintosh Les Misérables once was for the Royal Shakespeare Company — not classics. Besides, he adds, "it makes it very hard for the commercial sector to compete." Says Peter Hall, the former National Theatre head: "The truth is that big musicals don't need the protective environment of the subsidized theater, but the National needs musicals to afford to do the adventurous repertoire it was designed to do." Meanwhile, some commentators confess to a certain alarm at Mackintosh's seeming use of the National as a lower-cost try-out venue.

Act Two: The Star. Though she has precious little stage experience, British pop and TV soap star Martine McCutcheon gets the role of Eliza Doolittle, the flower-girl who is taught to speak like a princess. At the very last preview she falls ill, and her 18-year-old understudy Alexandra Jay sensationally wins a standing ovation. Only hours before press night, McCutcheon announces her recovery. Cynics uncharitably mutter words like "smokescreen."

Act Three: Opening Night. Happily for McCutcheon and the National, this is one "loverly" evening and sometimes much more than that. Nunn's production, soaked in loving period detail (the newspapers even chart Edward VII's pneumonia) catches precisely the brilliance of this work — the meeting of two theatrical cultures. Broadway babies Lerner and Loewe added heart to George Bernard Shaw's coolly intellectual Pygmalion, the play on which My Fair Lady is based.

So Nunn, in Anthony Ward's wonderfully supple design — an ornate framework of cream iron pillars into which the sets slide — displays both emotion and intellect to chronicle the unspoken romance between Eliza and Professor Henry Higgins, her chauvinist bully of a tutor. This is never more evident than in the famous ball scene where Eliza is passed off as a princess. Nunn surrounds her with admirers as Higgins' watchfulness perceptibly turns from academic interest to fretting jealousy. The effect is both funny and deeply touching.

After a nervous start McCutcheon relaxed into a warm, likeable Eliza. She still needs to savor the grand moments (alien to her TV grounding), but she has real star presence. When she emerged, dressed for the ball in a glittering white gown, she radiated grace and vulnerability. Hers is already an exciting interpretation, but the potential is tremendous.

Nunn cast as Eliza's no-good father London TV star Dennis Waterman. Filthy, his remaining hair plastered to his head by grease, Waterman gleefully kicks his way through Matthew Bourne's dustbin-lid-stomping choreography.

Yet the evening's great portrayal is Jonathan Pryce's Higgins. A nervously hyperactive beanpole figure, Pryce is an overgrown child, clowning about with his male friends but terrified of grown-up romance. By the end, Pryce quivers whenever Eliza comes close, bewildered by the charge she ignites in him. Finally, the pair meet as equals — they face off, arms folded and laughing. It is an appropriately heart-warming close to a real lady of a show. Curtain. Cue ecstatic applause.

(As many of you may know Martine has courted controversy by being seen frequently out on the town while apparently too ill to perform.)