When China inaugurated the first rail link to the Tibetan capital of Lhasa in 2006, officials were justifiably thrilled at the engineering achievement. Running higher than any other railway in the world, the track covers more than 500km of permafrost: engineers secured the rails by driving pins 30m into the ground and developed an air cooling system to stop the ice melting in the summer.

China's leaders billed the railway as a symbol of the government's efforts to bring its brand of economic modernisation to the distant, mountainous and isolated region. "The railway is of major significance for accelerating the economic and social development of Tibet," said President Hu Jintao, who was once Communist party secretary of the province. "It shows we have the courage, confidence and ability to stand among the advanced peoples of the world."

Less than two years later, Chinese policy in Tibet is in disarray. Early last month, Lhasa witnessed four days of peaceful protests led by monks and a violent riot that targeted Chinese government buildings and shops owned by Han Chinese, leaving 18 people dead.

Although the Chinese government has not officially declared martial law in Lhasa - as it did after protests in 1989 - there is now a heavy military presence in the old Tibetan part of the city, with regular checkpoints and most shops closed. The monasteries where the protests began are blocked off and the monks locked inside. There were reports of new unrest in Lhasa over the weekend.

Even the impressive new railway station - 5km out of town and built especially for the recently opened line - was surrounded last week by a wide police perimeter. Passengers had to negotiate at least two checkpoints and journalists attempting to visit the station could not get within 200 metres.

While Lhasa has attracted most of the attention, protests have spread to as many as 50 towns in Qinghai, Gansu and Sichuan provinces. (Around half the ethnically Tibetan population lives outside the Tibetan Autonomous Region.) The unprecedented wave of demonstrations has prompted a massive deployment of paramilitary police and soldiers to these areas, where there is now an almost complete blackout of information and access.

Rather than winning the hearts and minds of the local population, the rush of Chinese-style modernisation - accompanied as it is by an influx of migrants from other parts of China to the region - appears only to have hardened opposition among many Tibetans to the Beijing government. "In terms of the scale of the protests and the subsequent troop deployment, there has not been anything like this since the 1950s," says Andrew Martin Fischer, a Tibet expert at the London School of Economics, referring to the period of unrest that followed the Chinese invasion.

The crackdown is also threatening to spoil the Olympic party that Beijing has been so assiduously planning for this August. Nicolas Sarkozy, France's president, has openly raised the possibility of his not attending the Olympic opening ceremony, although no country has yet formally announced a boycott. China had hoped the Beijing Olympics would finally cleanse its reputation after the 1989 Tiananmen massacre; instead, the Olympics are providing a platform for a new surge of condemnation, with Tibet at the forefront.

Anyone looking at the economic statistics might find it strange that Tibet is so restive. At a time when the Chinese economy has startled the world with its rate of economic growth, Tibet has been expanding even faster - its economy grew by 14 per cent in 2007, helped by huge flows of government investment. Even rural incomes have risen sharply over the past five years.

Like so many other places in China, Lhasa is undergoing a building boom - the road from the airport is lined with dealers selling construction machinery. Tourism is also exploding, with the number of visitors last year approaching parity with the province's population of 2.8m. The western section of the city, where many of Lhasa's Han Chinese live, bears all the signs of a rapidly emerging consumerist middle class, with bars, restaurants, mobile phone shops and massage parlours.

"I think the Chinese government's policies on Tibet have been practical and have contributed to Tibetan people's life and social development," says Lian Xiangmin, a researcher at the Beijing-based China Tibetology Research Center.

Yet while some Tibetans have benefited, many experts on the region believe that there has been only limited trickle-down to most of the local population. Inequality has risen sharply, meanwhile, further fuelling resentment. "Tibetans are still very much the majority group but Han Chinese migrants have come to dominate the opportunities in the urban economy," says Mr Fischer.

In the tourism sector, for instance, most of the visitors are Han Chinese who use travel agents, stay at hotels and eat at restaurants run by other Han Chinese. Speaking Chinese is a prerequisite for taking advantage of the economic boom, yet only around 15 per cent of Tibetans have completed secondary school, where they would learn the language. Even educated Tibetans feel discriminated against because of the emphasis on Chinese language. Mr Fischer says there was a demonstration two years ago by university graduates in Lhasa after only two of 100 government jobs - which were awarded based on an exam in Chinese - went to ethnic Tibetans.

"In order to benefit from the new economy, you have to become more Chinese," says Nicholas Bequelin, a researcher at the US-based Human Rights Watch. "If you do not do that, you will be marginalised and development will pass you by, which breeds resentment."

China's political approach to Tibet might also have contributed to the unrest. The heavy public investment of recent years has been accompanied by an increasingly hardline political stance and more aggressive efforts to assimilate the local population - or "integrate them into socialist society", as officials describe it.

Since the end of the Cultural Revolution, when large parts of Tibet's Buddhist heritage were devastated, China's approach to Tibet has gone through a number of phases. In 1980, Hu Yaobang, then the country's Communist party secretary and a relatively liberal figure, saw at first-hand the failure of Beijing's policies in Tibet and helped push through reforms allowing for greater religious freedom.

Behind the scenes, informal contacts between the Dalai Lama and Chinese leaders also continued, in the hope of finding a formula under which the exiled spiritual leader could return to Tibet. But all of these conciliatory efforts went up in smoke in September 1987, when the Chinese beat monks and fired on demonstrators who had been protesting outside Lhasa's Jokhang temple in favour of Tibetan independence. The tough line was maintained when Hu Jintao took over as Tibet party secretary in 1988 and has been in place ever since.

Mr Hu has supported the appointment of hardliners to fill the post of Tibet party secretary. Chen Kuiyan, who ran the province for eight years until September 2001, described Buddhism as a "foreign culture" and an obstacle to economic growth.

Zhang Qingli, the incumbent, was moved in 2005 from the western province of Xinjiang, where as deputy party secretary he had been heavily involved in a campaign to stifle anti-Beijing dissent among the majority Muslim population.

On arrival in Lhasa, he adopted an even tougher stance on Tibetan cultural identity. He stepped up "patriotic education" classes at monasteries, where monks are required ritually to denounce the Dalai Lama and to declare loyalty to Beijing. Rules that ban university students and the family members of government employees from attending religious services were more strictly enforced.

Some Tibet experts say that Mr Zhang further exacerbated tensions through rhetoric that appeared to patronise and belittle Tibetans. "The Communist party is like the parent to the Tibetan people and it is always considerate about what the children need," he said in a speech in Beijing last year. "The central party committee is the real Buddha for Tibetans."

Beijing's response to the crisis in Tibet has been uncompromising. The authorities have concentrated on an external enemy, blaming the Dalai Lama for stimulating the protests and using aggressive language that harked back to the Cultural Revolution. Mr Zhang called the elderly cleric a "a monster with a human face".

The government has also launched a ferocious propaganda drive. Discussion has focused almost entirely on the March 14 riot in Lhasa, when most of the dead and injured were ordinary Han Chinese. A two-day media trip to Lhasa last week, organised by the central government, took journalists around a series of burnt-out buildings and reporters were given a DVD containing an assemblage of video clips of the worst incidents of rioting. The Yishion clothes store on Beijing Road, Lhasa's main street, where five young women were burnt to death, has become a flower-filled shrine to the violence. "There is no ethnic tension, the situation is really very harmonious," owner Tang Qinyan told reporters.

For the domestic audience, the effect of concentrating on the riot has been to portray Han Chinese as the victims of the disturbances and head off a discussion about the causes of the unrest. The tactic has been successful at mobilising support from the Chinese population. Websites have been full of outrage at the violence in Lhasa, while many Chinese have attacked the alleged bias of the international media. Journalists at CNN, the US broadcaster, were forced to leave their Beijing office at one stage because of the threatening phone calls they had received, while a Chinese student has started a website called anti-cnn.com. (CNN has vigorously denied the allegation of bias.)

The incidents have played into a strong sentiment among many Chinese, especially among educated urban youth, that the country is being unfairly targeted in this Olympic year by people jealous of its new power and dynamism. "Over here, we build sports venues and subway lines and airport terminals, working ourselves ragged to prepare; over there, people use Darfur one day and Tibet the next to fan the flames of protest and boycott," writes one blogger from northern China.

Yet overseas, the reaction has often been very different. Many foreign observers have condemned the suppression of the peaceful protests in Lhasa that preceded the March 14 riot and of the large number of demonstrations that have broken out in other Tibetan areas. In a telephone call with Mr Hu last week, the White House says US President George W. Bush "pushed very hard" over violence in Tibet and the need for restraint on the part of Beijing.

Even the Lhasa riot has played differently abroad: while Chinese viewers see Han Chinese victims of criminal violence, many foreigners see such an explosion of ethnic rage as a sign of policies that have gone badly wrong. When a group of saffron-robed young monks interrupted a briefing of visiting journalists in the Jokhang temple last week, shouting about freedom and complaining about being treated like prisoners, the international media jumped on the image as evidence of Beijing's continuing repression.

Not all foreign observers are so critical of all aspects of the Chinese position. Barry Sautman, of the Hong Kong University of Science & Technology, says that China has the right to crack down on separatist movements, just as other countries do. He adds that the 20,000 or so who have been involved in the demonstrations do not necessarily reflect the views of the 5m-6m ethnic Tibetans in China.

However, he adds: "I think it [the protest] does represent the majority view on one point - the desire of people for the Dalai Lama to be allowed to return."

Indeed, for most foreign observers, the solution to the crisis runs through the Dalai Lama, and China is under mounting pressure to return to negotiations. This does not necessarily mean a homecoming for the spiritual leader, to which the Chinese leadership would be highly reluctant to agree. But it would involve a very different cultural and political approach to Tibet, including less interference in Tibetan Buddhism and more policies to promote Tibetan employment and education.

Among some Chinese academics, there is also support for a different strategy. "In the past 50 years, the Tibetans have benefited a lot from the central government's policies," says Dou Yingcai, an expert on ethnic minorities. "However, the central government should also review its nationalities policy and think about why they are still angry and unsatisfied, for all the money, energy and human resources we have put into building their temples. We probably do not pay enough attention to their peculiar combination of politics and religion."

There have been talks about talks between the two sides for a number of years, but they have foundered on a few points - including China's insistence that the Dalai Lama recognise Tibet as an inseparable part of China's territory, as well as the status of the ethnic Tibetans who live in other Chinese provinces.

While the rhetoric from Beijing has been uniformly hostile to the Dalai Lama since the protests, Wen Jiabao, the Chinese premier, appeared to adopt a different tone on a visit to Laos over the weekend, saying that communication channels were open and hoping that the Dalai Lama would use his influence to limit the violence.

Beijing has an incentive to adopt a more conciliatory stance, at least in the short term, given that the Olympic torch is due to be paraded through the streets of Lhasa in June. Further protests then would be a huge embarrassment to the government.

Most foreign observers believe, however, that China will not change its approach. There would be strong opposition among top leaders to granting greater religious or political autonomy to Tibet, for fear that it would set off a spiral of similar demands from other parts of the country, notably Xinjiang province.

Moreover, given the degree of anger about the riot in Lhasa among ordinary Chinese and the level of hostility towards the Dalai Lama, there would be great political risks in changing course. "The Chinese have boxed themselves in," says Susan Shirk, a former Clinton administration China expert and author of China: Fragile Superpower. "They have established a line on Tibet and everyone has been taught that line, so when something like the protests happens, they are obliged to make a stand on principle." She adds that Chinese leaders have a "deep sense of fear and jealousy, which is based on political insecurity, that if people believe in Buddhism or the Dalai Lama or even the Pope, that this will endanger support for the Communist party".

Instead, most Tibet experts believe Beijing's plan is to wait. Once the 72-year-old Dalai Lama dies, so the argument goes, Tibetans will no longer have a viable leader and political support for autonomy or independence will wither.

Over a period of several decades, it is possible that Beijing might be able to grind down Tibetan nationalism, especially if the economy keeps growing rapidly. Yet without the Dalai Lama's restraining influence on the younger generation, says Ms Shirk, there is likely to be more violence against the government and Han Chinese migrants, not less. If that happens, Tibet would remain a source of instability within China and of international tension between China and other countries, long after the Beijing Olympic torch has been extinguished.