For five days in July, the Brazilian seaside town of Parati hosted some of the world’s most celebrated authors. Where else might one spot Paul Auster and Siri Hustvedt tripping over colossal cobbles while Margaret Atwood fingered dresses and geared up for serious bird-watching?

There was Englishman Martin Amis (nowadays almost impossible to spot outside Uruguay), sampling the local cuisine, and Irish novelist Colm Tóibín sampling the local firewater. There too was Angolan novelist Jose Eduardo Agualusa, considered one of Africa’s finest, bumping into French cult author Pierre Michon. And was that Jeffrey Eugenides, of Middlesex fame, offering to take his clothes off for a whooping audience?

In case the list of foreign visitors wasn’t interesting enough, the line-up of Brazilian writers offered a Who’s Who of the country’s best. It included two of Brazil’s most widely read authors, Moacyr Scliar and Luis Fernando Verissimo; the grand dame of Brazilian letters, Lygia Fagundes Telles; and two of the most feted short-story writers, Sergio Sant’Anna and Luiz Vilela. Also present (for a while, at least) were two of Brazil’s most popular singer-songwriters, Chico Buarque and Caetano Veloso, both of whom have, in recent years, turned to writing.

All were in the colonial town south of Rio de Janeiro to attend the Festa Literaria Internacional de Parati (FLIP). Well used to the bustle of religious and cultural events occurring 228 days a year, Parati’s inhabitants agreed that there was something quite different about this festa.

Seasoned festival-goers found themselves admitting that FLIP was extraordinary even at a time when international literary festivals are commonplace. It is the only event of its kind in Latin America. Only in its second edition, it has already garnered the sort of recognition and visitor numbers (12,000 according to organisers) that a literary event such as Hay-on-Wye took many years to cultivate.

The festival is the creation of British publisher Liz Calder, founding editor of Bloomsbury and noted for launching the careers of Julian Barnes and Salman Rushdie.

Bloomsbury, which famously struck gold by publishing J.K. Rowling, already has Brazilian writers on its list. Over the next few months it will release a handful of new titles, including the latest fiction by Chico Buarque, Amazonian author Milton Hatoum and noir-novelist Patricia Melo.

Calder’s connection to Brazil is personal as well as professional. She lived in Sao Paulo during the 1960s. For more than 10 years she has been a regular visitor to Parati, and for the past four has owned a house that looks out on to one of the myriad islands dotting the coast. Of all the fascinations the country can offer, she believes that “the really sexy thing about Brazil is its literature”.

FLIP celebrates a brimming literary culture that is becoming more internationally conspicuous. Although Brazil - the world’s fifth-largest country in area and population - boasts a tradition as rich as that of any other in the Americas, its authors have rarely achieved the worldwide recognition of Colombia’s Gabriel Garcia Marquez or Peru’s Mario Vargas Llosa.

And yet Brazil produced its own breed of modernists - writers such as Joaquim Maria Machado de Assis (1839-1908), much admired by Susan Sontag and Salman Rushdie, or Joao Guimaraes Rosa (1908-1967), whose Grande Sertao: Veredas (The Devil to Pay in the Backlands) is a work of Joycean inventiveness - and it had a perennial contender for the Nobel Prize in Jorge Amado, the populist writer from the north-eastern state of Bahia.

Perhaps the only Brazilian name to have truly reached the modern world stage is Paulo Coelho. To date he has sold 55 million books worldwide, 11 million of them in English. His bestselling title, The Alchemist, was recently included among Britain’s 100 favourite books in a BBC survey, and awarded an industry gong for sales of more than half a million copies in the British market over five consecutive years.

Coelho, who has cornered the market for what booksellers call “inspirational fiction”, makes the literati uncomfortable. He is a market phenomenon. Some claim that he is not relevant to the Brazilian context. It is true that Coelho’s nationality hardly impinges on his writing. As far as his readers are concerned, he might just as well be Swiss.

Today, Brazil’s true cultural and geographical diversity is reflected in the range of literary styles and subjects - from Marcio Souza’s parodies of Amazonian history to Lya Luft’s atmospheric depiction of life among descendants of European immigrants in southernmost Rio Grande do Sul.

Meanwhile, a growing trend in urban writing reflects the fact that more than 75 per cent of Brazil’s population lives in large cities. Numerous modern Brazilian authors excel at writing cronicas, brief vignettes that are part essay, part personal narrative.

A young generation of authors, formed mostly as screenwriters, is snapping at the heels of the older masters. Brazilian literature, as any national literature should, is constantly renewing itself.

At a glance, Brazil is an unlikely candidate to be a literary powerhouse. Among its 180 million people, adult illiterates (13 per cent of the population) outnumber adult book buyers (10 per cent).

The average price of a new book ($15) represents one-fifth of the monthly minimum wage. Neighbouring Argentina, with only a quarter of Brazil’s population, has a market twice the size (conventional wisdom used to maintain that there were more bookstores in the Argentine capital, Buenos Aires, than in the whole of Brazil).

In such a vast country, distribution remains the most severe stumbling block. The book trade is limited almost entirely to the states of Rio de Janeiro and Sao Paulo. A quarter of the country’s towns and cities do not have public libraries.

For all the country’s endemic difficulties, the Brazilian publishing industry appears to be thriving. What strikes a casual observer is its cosmopolitanism. New books from abroad are translated into Portuguese within months, not years.

Although average print-runs for local authors do not exceed 2,000 copies, Roy Jenkins’ biography of Churchill has sold 18,000, and The Da Vinci Code, by Dan Brown, has sold 50,000 so far. A casual stroll along Rio de Janeiro’s trendy Rua Dias Ferreira will reveal almost as many bookstores as there are new bars and restaurants.

Earlier this year, the Sao Paulo book fair reeled in half a million visitors (the last Frankfurt book fair, a trade event rather than a book-selling event, attracted roughly half that number).

A booming market is drawing foreign investment: Spanish publishers Planeta and French chain FNAC have already claimed their share of the action. “People in Europe haven’t the slightest idea of how dynamic the publishing market is in Brazil,” says Ray-Gude Mertin, a Frankfurt literary agent who for 30 years has represented Brazilian authors abroad.

Mertin remembers how publishers always used to demand the Brazilian equivalent of Garcia Marquez’s One Hundred Years of Solitude. She is relieved that the so-called Latin American “boom”, spearheaded by authors from Spanish-speaking nations, is a thing of the past. “My main enemy is the exotic idea people have of the country."

"I try to explain that Brazil is not all Guimaraes Rosa’s sertao (backlands), nor is it all Amado’s Bahia. But cliches are difficult to eradicate from people’s minds.”

I ask if recent films, such as City of God or Carandiru (both based on successful books), might alter people’s perceptions of Brazil.

“Yes, but it’s all favela (slum), favela, favela, and a general image of misery and corruption. We should be paying attention to those authors who describe normal day-to-day life, nothing exotic.”

The Parati festival showcased a wealth of just such authors. Among them was Sant’Anna, whose first book, published in 1969, O Sobrevivente (The Survivor), established him as one of Brazil’s most creative practitioners of the short-story genre. The collection O Voo de Madrugada (The Red-Eye Flight, 2003), his thirteenth book, recently earned him the fourth Jabuti prize - the book industry’s largest award - of his career.

Sant’Anna’s early stories, published during the initial years of a dictatorship that lasted until the 1980s, are disarmingly sparse and surprisingly effective in exposing the minute quotidian frustrations in a society bereft of means of expression.

His subsequent work is laced with oblique humour. His take on the pantomime world of Brazil’s populist politics, Notas de Manfredo Rangel, Reporter, exhibits an eye for the ridiculous, but also a gift for empathy.

Born in Rio de Janeiro, Sant’Anna has specialised in shedding light on the city’s middle class, with its vertical living arrangements, its larger-than-life aspirations and meagre rewards, the perennial paranoia cohabiting with the quest for sensual gratification.

Some of his most memorable pieces explore the infinite complexities and asymmetries of relationships between men and women. Dueto, a story told in three voices, is about love on the brink of boredom, desire on the brink of hate. It depicts an adulterous man and his lover at their most vulnerable, experiencing pain even as they strive for pleasure. “That,” he tells me candidly, “is a very autobiographical story. I wrote it after a passionate affair with the woman who became my second wife.”

His latest collection retains the lightness of touch and the surgical precision of observation, now steeped in a gothic sense of the horror and beauty in ordinary life. “The way to write about sex and death and disease is to find the poetry in them,” he says.

Sant’Anna shared the stage at Parati with Luiz Vilela, a man billed as “the prince of the Brazilian short story”. The two have been close friends since they edited a literary magazine together in their student days.

“What people do in creative writing workshops today we used to do in the bars of Belo Horizonte,” claims Sant’Anna. But, whereas he went on to become Brazil’s purveyor of urban gothic, Vilela remained the pulse-taker of daily life in Brazil’s highlands. His stories are set mostly in a nameless “small inland city”, much like his own Ituiutaba, in the state of Minas Gerais. Far from depicting a comfortingly picturesque world of tightly knit communities, Vilela delicately pries open a microcosm of solitude and suppressed aspirations.

The tension between small town and big city is an ever-present concern: “The state of Minas is like a mother who expels her children,” he says over lunch. “We all feel we have to leave. Even so, many of us end up coming back. This is what I write about.”

The permanently denim-clad Vilela believes that storytelling is inherent to Mineiros who, like him, grew up sitting around a kitchen fire listening to, and endlessly retelling, casos or anecdotes. “Mineiros who don’t recount casos go crazy,” he says. “Telling stories is our way of exorcising madness.”

When it comes to discovering the realities confronted each day by average Brazilians, there is no better place to look than in the cronicas, or chronicles, published in newspapers and often collected in books.

The cronica is a hybrid genre, on the verge between the journalistic and the confessional, of the kind popularised in early 18th-century Britain by Jonathan Swift and Joseph Addison. Joao Ubaldo Ribeiro, one of Brazil’s foremost novelists, and a recalcitrant member of the Brazilian Academy of Letters, is also one of the country’s most popular cronistas.

He enjoys the playfulness that the genre allows: “A cronica can be anything,” he tells me, apologising for his edginess (he has not smoked for 10 days when we meet). One of his preferred tricks is to script conversations “overheard” in a boteco, or bar, in Rio’s Leblon district - his own neighbourhood.

“I hardly leave this part of Leblon, so my only contact with the world is through my friends at the boteco. In my weekly pieces I sometimes try to recreate the sort of gossip one hears there, the way people in those bars drunkenly discuss politics and life.”

He also likes exploiting the Swiftian satirical vein. His own “modest proposals” - that Brazilians go naked to save energy, that the poor be tattooed to improve social control, that Brazilian Portuguese be cleansed of its barbarisms - are often met with outrage by readers who take him seriously.

Ribeiro is also the author of what some critics insist on describing as the Great Brazilian Novel, Viva o Povo Brasileiro (self-translated as An Invincible Memory). It is a lengthy jaunt through more than three centuries of Brazilian history, coloured by discussions on the theme of national identity. “I’ve said this many times, but nobody believes me: I wrote that novel as the result of a bet. A friend of mine was complaining about how short all Brazilian novels were. I told him I would write a big one.”

These days, Ribeiro is known as the man who did not go to Parati. He was scheduled to appear on a panel called “The classics’ classics” alongside fellow academicians Fagundes Telles and Scliar, to talk about their canonical authors.

Three weeks before FLIP began he turned down the invitation. He accused the organisers of giving prominence to authors published by Companhia das Letras, one of Bloomsbury’s Brazilian partners in organising the event, and of ignoring those, such as him, published by someone else.

The accusation was unfair, but it got Ribeiro off the hook, gave him time to get on with an overdue novel, and allowed him to drum up some publicity for his latest collection of cronicas.

When the festival’s organisers sought a replacement, Verissimo, who was already scheduled to appear in a panel on humour, stepped in. He sells more books than any other literary author in Brazil, outselling even Paulo Coelho at home. Like Ribeiro, Verissimo writes cronicas documenting the domestic manners of middle-class Brazilian urbanites for Brazil’s biggest newspapers. Like Ribeiro, he has also written novels - the latest, Borges and the Eternal Orang-Utans, is published in Britain by Harvill. Unlike Ribeiro, he sees his own novels as a diversion.

"I’m more of a cronista than a novelist,” he confesses in a quiet voice that masks his fierce wit. “Some of the greatest Brazilian writers - Rubem Braga, Paulo Mendes Campos, Antonio Maria - only wrote cronicas."

"As a literary category, they are a very Brazilian phenomenon. What interests me is the freedom they allow. They are impossible to define: they can take the form of a short story, political commentary, even something poetic, slightly crazy.” The trouble with cronicas, he acknowledges, is that they don’t really travel. Verissimo’s best-selling compilations would be of little relevance to anyone outside Brazil.

Our conversation turns to his novels - slim, stylish, funny. I am surprised to learn that all three of them were commissioned. The first one, O Jardim do Diabo (The Devil’s Garden) was written for a company that wanted to offer its clients a special gift.

The second, O Clube dos Anjos (The Club of Angels), was for a series on the seven deadly sins which included a novel on lust by Ribeiro. “I like eating,” he tells me with a placid smile, “so I chose to write about gluttony.” The book was a runaway hit in Brazil.

He wrote Borges and the Eternal Orang-Utans for a series of crime novels published by Companhia das Letras. “The only conditions were that it had to be a crime book, and that it had to involve a famous author.” Thus he turned Argentine writer Jorge Luis Borges into a character in an appropriately elliptical and bookish tale revolving around the inexplicable death of an academic. “I don’t think of myself as a novelist, but I enjoy the challenge of doing it.”

Readers’ interest in a country’s literature often hinges on extra-literary matters. Take politics, for instance. In the mid-1980s, when two decades of military rule came to an end, the outside world turned its eyes towards Brazil. What the outside world found (or chose to look at) was Amado, who for the past 30 years had been penning novels about a colourful mixing pot of enterprising immigrants, insatiable mulatas and amiable, wise drunks. And the outside world loved him.

A similar media phenomenon may have begun to occur in 2002 when Brazil’s first working-class president, Luis Inacio “Lula” Da Silva, was voted into office. It is too soon to say who or what will catch the outside world’s attention this time, but Parati will undoubtedly play some role.

Another reason why Amado was for so long an international standard bearer for Brazilian literature is that some of his novels - notably Dona Flor and Her Two Husbands - were turned into memorable movies.

Today, the emerging wave of Brazilian literature is closely related to a new wave in Brazilian film. Not only because successful movies are being made out of bestselling fiction and non-fiction (City of God, Carandiru and Chico Buarque’s Benjamin are only three examples), but because some of the younger authors happen to be screenwriters too.

Marcal Aquino and Fernando Bonassi, who were involved in many of the most recent Brazilian film projects, write short stories that read like screenplays - minimalist, snappy, big on dialogue.

The proximity of literature to other media is obvious in the writing of young authors such as Marcelino Freire (b. 1967), Daniel Galera (b. 1979) and Joca Reiners Terron (b. 1968). All three run their own web-logs, and acknowledge that the trademark brevity of their hard-hitting stories is a result of the medium’s demands (Freire recently edited a collection of “the century’s 100 shortest Brazilian stories”).

All three have set up backroom publishing operations in the process of trying to get their work into print. All three edit, design and distribute their own books, and those of their peers. The result is exhilarating - and extraordinary given some of their backgrounds. “People ask me what books I read as a child in the family library, in the backlands of Pernambuco. Library?” Freire laughs. “We didn’t even have running water!”

The critic George Steiner wrote that the purpose of a festival should be three-fold: first, it must celebrate the great practitioners of an art; next, it must recover that art’s old and forgotten worthies; finally, it must discover the new and exciting voices.

The presence of Freire, Galera and Reiners Terron at the Parati festival made sure that the third stricture was covered. There could be no doubt that FLIP was celebrating some of the greatest living writers, both in and outside Brazil. As for bringing an old master to the attention of new audiences, the festa paid homage to none other than Joao Guimaraes Rosa.

Perhaps one of the great triumphs of the festival is that it spurred publishers, agents and translators into seriously considering a new translation of his masterpiece, Grande Sertao: Veredas.

It will be interesting to see how this year’s FLIP affects the reputation of another classic. There was something eerily “on-message” about the way in which many guest authors claimed to have suddenly embraced the other outstanding Brazilian modernist. Ian McEwan did it. Siri Hustvedt did it. Paul Auster in his baritone voice did it.

When asked the obvious question - “Have you read any Brazilian authors?” - they all said they were enjoying a book by Joaquim Maria Machado de Assis. Even Martin Amis, who has never missed a chance to sing the praises of Saul Bellow and Vladimir Nabokov, chose Machado de Assis’ Memorias Postumas de Bras Cubas (Epitaph of a Small Winner, 1881) as his desert island book.

Local opinion on Machado was divided at Parati, proving that, while foreign readers are only just beginning to appreciate him, Brazilians, many of whom read him at school, may have moved on to newer pastures. Fagundes Telles, discussing her favourite classic, gave a masterclass on Machado’s unreliable narrator novel Don Casmurro (1900). Meanwhile, in one of the most misquoted soundbites to emerge from the event, Sant’Anna declared: “Machado bores me to death.”

It is too early to gauge the strength of the “Parati effect” on the profile of Brazilian literature abroad. For the time being, the usual grumbling and politicking attendant to successful ventures is under way in Brazil.

Some politicians complained that the R$300,000 (£58,000) put out by the National Library Foundation to sponsor FLIP could have been spent on more urgent projects. Some were simply sore that this was an event organised mostly by Ingleses, for Ingleses. A case in point is the town’s name - the locals spell it Paraty. Such criticism is, in itself, a measure of the festival’s impact.

In the town, a few individuals expressed quiet concern about the size of this year’s festa, which they described as a “mega-event” as opposed to the original “intimate” meeting of minds. Indeed, this summer’s FLIP was so large it even sprouted its own fringe festival, an Off-FLIP. Some of the wealthy patrons from Sao Paulo, who forewent the luxury of their winter retreats to attend the event for a few days, hope it won’t grow. “Tell people it’s horrible here,” one pleaded. “We don’t want this to get any bigger.”

They needn’t worry. According to Calder, the right balance has been found. And, buoyed by the event’s unqualified success, she has announced that next year’s FLIP will pay homage to another shining star of the modern Brazilian canon, Ukrainian-born Clarice Lispector.

Attendees can look forward to more of the strange things that happen when, in Calder’s own words, “people who like books get together in a magical place”. In July, Parati was full of such surprises. Some - like Martin Amis announcing that radical Islam will be his topic for some time to come - were newsworthy. Others were astonishing for their poignancy.

How can one forget Toibin producing scented bars of Sweeney’s Lemon Soap (the same kind that Ulysses’ Leopold Bloom buys on 16 June 1904) and throwing them into the audience to make a point about the presence of the past? Toibin, who appeared to embrace the Brazilian experience more wholeheartedly than his Anglophone peers, was then almost reduced to tears as actor Regina Braga read Molly Bloom’s final monologue from a new translation of Ulysses. Further proof, Toibin joked, that Joyce had a Brazilian woman in mind when he wrote it.

Some things were surprising by their sheer unlikelihood. Seeing Chico Buarque and Paul Auster reading from each other’s novels, for instance. Or watching Liz Calder lose her cool. For even she, who knows a thing or two about writers and their wily ways, was caught out in public by Margaret Atwood’s acerbic humour while chairing a discussion. When Atwood playfully refused to go along with the niceties of a reading followed by a Q&A session, Calder, her long-time friend and editor, panicked. “Let’s talk about... writing and writers, shall we?”

And why not? They were in the right place, and in the right company, to do just that.

BUDAPEST by Chico Buarque Bloomsbury £13.99, 183 pages

BORGES AND THE ETERNAL ORANG-UTAN by Luis Fernando Verissimo Harvill £12, 512 pages

TALE OF A CERTAIN ORIENT by Milton Hatoum Bloomsbury £14.99, 212 pages

BLACK WALTZ by Patricia Melo Bloomsbury £10.99, 224 pages

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Brazil’s rich literary tradition (or Flipping in Parati)