Half the Cambodian population seems to flow into Phnom Penh for the Retreat of the Waters Festival, which celebrates the changing of the Mekong tides on the last weekend of November.

For half the year, in the monsoon season, the Mekong swells and sends water gushing down Tonle Sap river and into Tonle Sap lake, the largest in Southeast Asia. During the dry season the Tonle Sap reverses its flow, draining the lake and filling the Mekong, thus making sure the region's vital rice harvest is a success.

Dragonboat races are held for several days during the festival, which concides with Sampeah Preah Khai - the prayers of the full moon - and Ok Ambok, which sounds like a karaoke bar, but in fact means 'pounding of the rice'.

After decades of disruption due to civil war and genocide and a shortage of beer, Cambodia revived the Retreat of the Waters Festival with modest fanfare in 1991.

Cambodia claims a precarious peace in the aftermath of the largest United Nations peace-keeping operation. The economy is tattered, roads are appalling and the land mines will take 30 years to clear. Even local grandmothers are sometimes armed with grenades.

Still, there is much to cheer. Cambodia has a new constitution, a popular king, and, by many estimations, one prime minister too many. Peace may be an uphill struggle for Phnom Penh but this battle-plagued city has not forgotten how to party.

National flags drape boulevards from the Royal Palace to the airport. Monks motor past on Hondas, only to be turned away by smiling guards at the barricades. Beer sells from street stalls for HK$4.

Already a slow city, Phnom Penh grinds to a halt in the days before the festival. Calls to government offices go unanswered, and businesses close for five days.

The weekend before the fiesta sees a hive of activity develop along the shores of the Tonle Sap. Gunboats are draped with Christmas lights and laundry is removed from the cannons. A huge stage rises overnight along the waterfront.

A park between the Royal Palace and the National Museum becomes a beer garden. Bands perform on stages underneath the corporate banners of numerous cigarette, soft drink and beer companies.

Another park nearby becomes a picnic ground, with bamboo mats spread over several football pitches. Scores of tiny stoves are used to prepare meat, sate chicken and steamed rice. Stalls sell straw hats and bellows. And everywhere there is music, from minstrels, radios and loudspeakers.

Dozens of trendy clubs opened in Phnom Penh to capitalise on the high-spending United Nations brigades. The departure of 20,000 personnel has created havoc for the clubs and cafes, but a beguiling weirdness still prevails in the recent war zone. You can sip cappuccino while gazing over the Tonle Sap from the open balconies of glorious colonial French mansions, now converted into cafes. Warm French bread is available everywhere.

Homemade pasta and a sinful mousse make the menu at Deja Vu, run by a pair of former Lan Kwai Fong restaurateurs. After a scrumptious Thanksgiving meal, the owner, Anthony Alderson, runs us in an army jeep through the red light district of Tuol Kork. Womensit on outside benches, but only make half-hearted attempts to attract our attention. The UN days are over, and they know it.

The Cathouse is a bizarre city-centre bamboo bar, staffed by Filipinas. Once the lively late-night haunt of UN troops, the Cathouse is nothing to howl about these days. The owner, a beefy American named Walt, says he is about to pack it in. 'I've been running girlie bars for 17 years in the Philippines. I came here to make a fast buck, but now it's time to shut down.' But at the bar, Ken, an Alaskan bush pilot flying for Air Kampuchea, is happier. 'Life in the tropics is the greatest,' he says. 'I love it.' Nearby, the new B-Boss nightclub is bucking the trend. Rooms rent by the hour, with hostesses, who are listed on a menu. Cambodian, Vietnamese and Chinese hostesses cost about HK$40, but recent imports, from Russia, are twice as much.

You can get nearly anything you fancy in Phnom Penh. The gun markets offer pilfered boots, camouflage clothing and more. Local papers often quote the going rate for top guns. 'Prices for weapons have plummeted due to an oversupply,' reported one issue of the Phnom Penh Post, the best of the city's three English-language papers. 'M-16s with grenade launchers are going for a low US$32 a piece. Used AKs are a steal for only US$18.' Foreign investment is beginning to trickle into Cambodia, but much of it is small time. The most obvious sign of modernisation is the saturation of mobile telephones. The local phone service is still horrendous.

We break from the dragonboat races, rent a car, and play at being tourists, driving to the infamous Killing Fields and posing in front of the gruesome monument of skulls.

On the way back to the city we stop at the World Trade Centre, or rather the World Trade Centre sign. It hangs over a dirt driveway leading to a large dirt field. Standing in the middle is an enormous concrete structure, in a terminal state of incompletion.

The Cambodiana Hotel suffered the same fate. Begun by King Sihanouk in the 1970s, when he was still a prince, it languished as a concrete skeleton until just before the UN arrived, when its 380 rooms were quickly booked out at US$200 a night.

Visitors still complain about the service, but the Cambodiana has become quite classy. It must be the world's only five-star hotel with an opium den across the street.

Next door is the Floating Hotel, which the authorities want moved from its dock before the festival starts. We wander over just after the midnight deadline, but nobody is packing. The bar is closed, but the desk clerk lets us in, assuring us we can book a room.

The next morning the hotel has not moved. Instead, staff are defiantly serving Sunday brunch to all-comers. The local media is not there to cover the story. The journalists are all at the Foreign Correspondents Club, a marvellous bar with big balconies overlooking the waterfront.

Few of the reporters pay much attention to the dragonboat races either. Boats glide by with a strange assortment of crews on board, sometimes more than 40 rowers, some sitting and others standing. No one can explain the rules of the races. One reporter grumbles about the fireworks.

'I've been running around in the jungle for years, trying not to get shot,' he says, 'and now they're shooting rockets like crazy. It gives me the jitters.' Rooftop parties rage throughout the weekend on the waterfront. A large group of foreign residents guzzle Fosters and Victoria Bitter on top of the Rock Hard Cafe. Next door, Cambodians party on the roof of the Ponlok, a restaurant serving a local soup brewed from marijuana buds. The sign advertises 'special soup', beside a painting of a laughing cow.

The crowds thin only slightly following the 30-minute fireworks display. 'This would cost Disney a million bucks,' notes another pilot, Steve, who was unemployed in Florida, but now flies twice daily between Bangkok and Phnom Penh.

Cambodians stare in awe at the procession of gunboats, a flotilla of coloured lights that looks like a Macy's parade in Tijuana. One boat shows a huge scale of justice, while another hosts the Cambodian map in garish shades of red, purple, yellow, orange and green. Another looks like a blinking bar plaque.

The most intricate display features a globe of magenta lights on the back of a big sea dragon. An orange cart is pulled by a telephone across the globe, while children climb palm trees on either side. Underneath it all, in every colour imaginable, is the message, 'Welcome to the Kingdom'.

Tourists may be on the way, but for now this is a festival relished mostly by natives. 'This is wonderful, so big, so happy,' says one. 'It's a big party, for all of Cambodia. We can celebrate, now that we are free.' How to get there Dragonair flies direct to Phnom Penh every Tuesday and Thursday. Cost $5,160, round-trip.