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MELBOURNE is Australia's second-largest city, with a population of around three million - about half a million less than Sydney. Rivalry between the two cities - in every sphere from cricket to business - is on an almost childish level. In purely monetary terms, Sydney is now clearly in the ascendancy, having stolen a march on Melbourne as the nation's financial centre. The state government, led by Steve Bracks of the Labor Party, has continued the work of former premier Jeff Kennett, who tried and mostly succeeded in lifting the economy out of the doldrums in the 1990s, mainly by severe cutbacks or privatization of public services and of previously state-run utilities boards. While Kennett's fiscal puritanism definitely scored points by reducing public debt and improving the credit rating of the state, critics were quick to counter that out-sourcing or privatizing public services did not necessarily translate into greater efficiency and even more importantly that Victoria's economic growth has been achieved at a very high social cost - wealth is now more unevenly distributed, with increasing numbers of homeless people and drug addicts on the streets. In 1999, Kennett surprisingly lost the "unloseable election" to rank outsider Bracks, largely because his government neglected rural Victoria - Kennett once memorably described Melbourne as the vital heart of the state and rural towns as the "toenails" - but also because Kennett's election campaign focused almost entirely on his autocratic style of leadership, which proved a big turn-off for voters. Since seizing the reins of power, Steve Bracks has enjoyed a remarkably high standing in the polls, and his style is more inclusive and less confrontational than his predecessor. He has also concentrated his party's efforts on improving the key areas of health and education, as well as providing greater funding for rural areas.

However, Melburninans never tire of pointing out, in all modesty, that they have the incredible fortune to inhabit "one of the world's most liveable cities". Melbourne may lack a truly stunning natural setting or "in-your-face" sights, but with its subtle charms it is a city that grows on you, one that is undeniably a very pleasant place to live, and enjoyable to visit too. Magnificent landscaped gardens and parks in the English style provide green spaces near the centre, while beneath the skyscrapers of the Central Business District (CBD), an understorey of solid, Victorian-era facades ranged along tree-lined boulevards present the city on a more human scale. The air of approachability is further enhanced by the numerous arcades, lanes and alleyways in which are hidden some of the country's best cafés, pubs and speciality shops.

An extensive and ambitious redevelopment programme, begun during Kennett's tenure, continues apace and has markedly changed the feel of the city - if only by the sheer magnitude of the projects. This new Melbourne for the millennium has meant a host of public buildings, as well as the new Federation Square by the Yarra just south of the CBD, were completed in 2001 to celebrate the centenary of the Australian federation, and the redevelopment of the Docklands precinct west of the CBD is planned for the next decade. From this area of unused docks and rotting old warehouses a brand new city will rise, complete with hotels, office and apartment buildings, department stores, marinas and other leisure facilities. This, if nothing else, will at long last put Ava Gardner's much cited - but erroneously so - remark from 1959 to rest. She came here to film On the Beach and reputedly summed up her impression: "It's a story about the end of the world, and Melbourne sure is the right place to film it." A great line, but in fact the celebrated swipe was coined by Melbourne journalist Neil Jillet.

Actually, change came to Melbourne way before the Nineties. Large-scale immigration since World War II has, in a sense, brought the world to Melbourne, shaking up the formerly self-absorbed, parochial WASP mindset for good. Whole villages have come here from Lebanon, Turkey, Vietnam and all over Europe, most especially from Greece, furnishing the well-worn statistic that Melbourne is the third-largest Greek city behind Athens and Thessaloniki. The European influence is perhaps most obvious in winter, as trams rattle past warm cafés and bookshops, and promenaders dress stylishly against the chill. Not surprisingly, the immigrant blend has transformed the city into a foodie mecca, where tucking into a different cuisine each night - or new hybrids of East, West and South - is one of the great treats. Sport too, especially Australian Rules Football, is almost a religion here. The Melbourne Cup in November is a public holiday celebrated with gusto, and the city's collection of fine sporting venues are well used. Melbourne's strong claim to being the nation's cultural capital is well-founded: laced with a healthy dash of counterculture, Melbourne's artistic life flourishes, culminating in the highbrow Melbourne Festival in the last two weeks in October, and its slightly more offbeat (and shoestring) cousin, the Fringe Festival. The city also takes pride in its leading role in Australian literary life, based around the Writers' Festival in August. Throughout the year, there are heavyweight seasons of classical music and theatre, a wacky array of small galleries, and enough art-house movies to last a lifetime.