To reach the headquarters of the Swat Taliban, visitors jump into a metal cradle, much like a ski lift, that spans a broad river. After payment of a small fare the cradle zips across the water towards a sprawling new madrasa, still under construction, on the far bank.

Back in the 1990s this chairlift was operated by a young man who became a charismatic preacher named Fazlullah. He has since become the leader of the local Taliban. But these days he rarely comes to the mosque, preferring a more secluded hideout further up the valley from Mingora, Swat's main town.

So, journalists are welcomed by Muslim Khan, a burly man in a silky, jet black turban who speaks broken English with a striking American twang.

Khan learned his English over four years in Boston in the late 1990s, where he juggled jobs painting houses and manning a petrol pump. Now he juggles media queries on three mobile phones, all sheathed in white rubber.

The mission, Khan explains, is to forge an Islamic caliphate - a new religious state in Pakistan. After they take over, democracy will be unnecessary: Allah will run the elections. "Democracy is a system of European countries. It is not good for Muslims," he says.

The Taliban's ambitions are not small - the caliphate would engulf not only Pakistan, but the entire Muslim world. "We want to make a unity of Muslims states, just like the United States of America," he says. But for now they will settle for Malakand - a vast area that comprises one-third of the North-West Frontier province, where the Pakistani government two weeks ago agreed to impose Islamic rule following a controversial peace deal with the Taliban.

The Taliban achieved this victory after fighting the Pakistan army to a standstill in Swat. After 18 months of fighting, beheadings and suicide bombings, 850 people were dead and more than 100,000 had fled. The army has stood down, but tensions remain high.

Khan stops speaking as a voice crackles over his radio. It is Mullah Fazlullah, speaking from his mountain lair. He announces some news: the Taliban have captured four soldiers, disguised as militants. In response the army has mobilised; he exhorts his turbaned fighters to be ready for a fight. "Come out on to the road," he orders. "You should not stop anybody, but be on red alert."

After the interview dozens of men linger outside the mosque - mostly young men from the lower runs of Swat society. Photographs are forbidden but one, an older man with a grizzled face, agrees to speak. "Maulana Fazlullah is my leader," he says. "I follow his orders."

But asked what the Taliban want to achieve, he appears stumped. Then an older man interjects, waving and shouting. Nobody has permission to speak to the infidel, he says, except for Khan.

The loquacious Taliban commander is the sort of man that politicians in America, and Islamabad, have come to fear over the last week. Yesterday the US military chief, Admiral Mike Mullen, warned that Pakistan was moving "closer to the tipping point" - in other words closer to a nightmare scenario in which extremists cause the disintegration of this nuclear-armed nation of 170 million people.

Mullen's comments followed several alarmed - some say alarmist - statements by senior Obama administration officials, who apparently believe that President Asif Ali Zardari and his government are treating the Taliban threat much as Neville Chamberlain did Hitler before the second world war. The secretary of state, Hillary Clinton, accused Zardari's government of "basically abdicating" in the face of Taliban aggression and said that the country posed a "mortal threat" to global security. The defence secretary, Robert Gates, spoke darkly of an "existential threat".

The panic-tinged rhetoric was fuelled by events in Buner, a district 60 miles from Islamabad, where Taliban militants occupied government buildings and torched western aid agency offices. Even Pakistani politicians got alarmed; talk abounded of dams, motorways and even cities falling to the militants.

The trail of blame leads to Swat, the adjoining district, where thousands of Taliban enjoy the run of a mountain valley. Critics blame the government for buying an untenable peace, and they blame the army for lacking the ability - or willpower - to rout the gunmen.

Yesterday afternoon, amid rumours of imminent military action, the army's top generals held a crisis meeting. The army chief, General Ashfaq Kayani, issued a statement that the army "will not allow the militants to dictate terms or impose their way of life".

By last night, the Taliban had started to withdraw their fighters from Buner. Footage showed fighters clutching rocket launchers clambering into trucks and driving back to Swat. The threat appeared to have been averted, for now. But questions about the peace deal remain: about whether it is a stepping stone to peace or a terrible miscalculation that will allow a Taliban wave to unfurl across the North-West Frontier province, and engulf Pakistan.

In Mingora, litigants streamed into the city court last Wednesday where Qazi (the title for an Islamic judge) Peerzada Noor Muhammad Shah was getting ready to hear their cases. But the Islamic courts have yet to formally receive authorisation, so Qazi Shah has no power to deliver judgments. Instead he instructs people to seek arbitration from a village elder. "That's all we can for now," he said.

Many litigants held high hopes for sharia law - not out of concern for religion, but for efficiency and fairness. "The previous system was slow and corrupt. You had to want for 20 years," said Khan Maula, a vegetable seller with a long-running family dispute. "Now it can be done in days or months."

Soon, though, the changes will bring a harsher side. Taliban courts have already started floggings: a video of a turbaned fighter lashing a 17-year-old girl caused outrage a few weeks ago.

The bearded, long-haired fighters have vanished from the streets of Mingora but soon these punishments will come here, the Taliban promise.

Gone for now, but the militants' indelible mark remains - a police station in rubble, bombed-out schools. Swat's political class has fled to Peshawar; the police are cowed into submission. The police chief, hiding in a guarded house, declined to be interviewed.

Nobody seems sure who is in charge, but if anyone, it is the Taliban. Commanders give orders about the distribution of food aid, the movement of security forces, and what type of burka women should wearing. Shops are open but business is slow. Clothes trader Idriss Khan stood in an empty shop filled with rainbow-coloured dresses. "There is no real security," he said, waving a newspaper. "I read that the Taliban have kidnapped some people. I don't feel safe, and neither do my customers."

Yet the peace deal has also brought positive developments. The schools that have not been bombed, including those for girls, have reopened. In one such institution, Aatiya Haq, 11, proudly declared that the controversial peace deal had made her happy. Her reasoning is simple. Only three months ago she feared the Taliban would kill her on the way to class. Now she is back at her books, with dreams of becoming a doctor. "Now we can make Pakistan powerful with our studies," she says earnestly.

Her teacher, Ziauddin Yusufzai, who is also spokesman for the Swat private schools association, agrees. "Before we had a doubtful war, now we have a doubtful peace. I prefer this," he said.

The Taliban war is also a cultural struggle. According to Muslim Khan, sharia is incompatible with Pashtunwali, the proud, honour-bound Pashtun social code. In normal times Usman, a social activist, welcomes visitors to his hujra - a cosy room where Pashtun men gather to gossip, listen to music, and perhaps knock back a bottle of Russian vodka. But these are not normal times.

If the Taliban knew that Usman's hujra was filled with paintings and books, they would burn it down. He knows this, he says mournfully, because his own brother has joined their ranks.

Usman plays a video of the "dancing girls" - women with flowing hair and gold trimmed skirts, spinning elegantly before a crowd of admiring men. The colours are faded because this footage was shot decades ago. Now the dancing girls are extinct: the valley's most famous dancer was found shot dead last January; the others have since fled.

On screen, the silent images of the spinning women acquire a haunting quality. "That is the old Swat," says Usman. "The one that has disappeared."

The Taliban's political representative is the TNSM, or Movement for the Enforcement of Islamic Law. Its leader is Sufi Muhammad, a 78-year-old jihadi who led thousands of young men to fight American soldiers in Afghanistan in late 2001. Last year the government released him from jail to help rein in his son-in-law - Maulana Fazlullah.

On Wednesday afternoon Muhammad met government representatives. Afterwards, the old jihadi - a wizened man with lively eyes - sat in the corner of a dimly lit room. Asked whether feels close to achieving sharia law in Pakistan, he answered: "When a man dies, his wealth and luxury are of no use. Only a man's acts are considered."

The call to prayer rang out: he excused himself as his black turbaned followers stream into the mosque.