Tucked out of view at the top of the mirrored staircase, the thin woman dressed in a chic silk vest and calf-length grey skirt takes a long, nervous draw on her cigarette. She glances behind her to the door of her apartment and thinks briefly of escaping to her haven of rare books, plush chairs and ornate carved screens.

It's early afternoon on February 5, 1954 and below, in the refurbished grand salon at 31 Rue Cambon, Paris, guests are shrugging off winter coats and chatting excitedly. From her hiding place, the woman can see their reflections as they take their seats beside the runway - magazine editors from France, the US and the UK; photographers; the French novelist Louise de Vilmorin; French actress Annie Girardot and Russian poet and dancer Boris Kochno.

They're here to witness the woman's new fashion collection - her first in 15 years. But as the first model walks down the runway, it's clear that the designs - softly tailored blouses and collarless jackets - are not what the audience has hoped for. In the era of Christian Dior's "New Look" and voluminous skirts, Chanel's creations seem tired and dated.

As the salon empties, friends venture upstairs to find Gabrielle "Coco" Chanel gazing into the middle distance, fingering her pearls. "Perhaps I've lost my touch," she says. It is a rare moment of self-doubt for a woman whose fearless confidence helped revolutionise women's fashion. After an impoverished and lonely childhood, Chanel used her charm and talent to propel herself into the highest echelons of Parisian society, and to build a fashion empire synonymous with chic and famous for classics like the "Little Black Dress" and Chanel suit.

Yet despite her success, there were moments of heartbreak and loneliness, including the death of her true love, and the humiliation of being arrested for collaborating with the Nazis during World War II. For a woman accustomed to adoring reviews, the failure of her comeback show that day in 1954 would have been almost as painful, but Chanel persevered and had the last laugh. The European press almost universally hated the new line, but Americans loved it, and soon Chanel was dressing Grace Kelly, Lauren Bacall and Elizabeth Taylor. She was back in the fold of the fashion world - just where she belonged.

Gabrielle Chanel was born on August 19, 1883 in the Loire Valley, France, to a womanising travelling salesman, Albert Chanel, and a 19-year-old orphan, Jeanne Devolle. An illegitimate child, Chanel spent her early years on the road or with relatives. She was often lonely and would wile away hours in an overgrown cemetery talking to "her dead" and bringing them flowers and gifts of stolen cutlery.

When she was 11, her mother died suddenly and Albert put Chanel and her sisters, Julie and Antoinette, into an orphanage, then vanished. According to Axel Madsen's biography, Chanel: Woman Of Her Own (Henry Holt & Company, $31.99), Chanel never spoke of the orphanage, referring only to a new life with "aunts", believed to be the nuns.

In 1901, aged 18, Chanel went to live at a boarding school in Moulins and worked in a tailor shop, where her raven hair and dark eyes attracted the attention of Etienne Balsan, a soldier from a bourgeois family. At night, she pursued a career as a singer in the district's lowbrow concert halls, where she earned her lifelong nickname, Coco, from her signature songs - "Ko Ko Ri Ko" and "Qui Qu'a Vu Coco".

Eventually, Chanel realised she wasn't talented enough to turn professional, so she accepted an offer from Balsan, now a horse breeder, to live as his mistress at Royallieu, his stone manor in northern France. Madsen says her unique brand of "reverse elegance" was perfected there: the crinolines worn by fashionable ladies at the time were no good for riding horses, so 22-year-old Chanel developed a reputation for borrowing clothes from Balsan and male friends - a bulky, tailored coat, a silk tie - and eschewing the over-the-top style that was de rigueur.

"She dressed in tailor-made frocks, mannish high collar and tie, and with a boater and hatpin holding her luxuriant long hair in place," writes Madsen. "She dared to show up for cross-country rides in jodhpurs cut from a stable groom's pattern. She expressed her youthful, slightly defiant femininity in the only way she knew how - in her clothes."

It was a theme that Chanel continued to pursue throughout her life, believing that women should be more than mere ornaments. Soon, Balsan's high-society friends were asking her to create clothes for them, particularly customised hats.

But it was a 1910 trip to Pau, a city nestled near the Pyrenees, that would prove life changing. There, while sipping cognac in a 13th-century chateau with Balsan and his friend Arthur "Boy" Capel, a charming English polo player, Chanel told them she wanted to open a shop in Paris. Balsan dismissed her, but Capel was enthusiastic: "Why shouldn't she want to do things?" Balsan yielded, and even offered 27-year-old Coco the use of his Parisian bachelor pad.

The next morning, Capel was to leave for the French capital - and Chanel realised she couldn't let him go. Impetuously, she scribbled a note for Balsan: "I am leaving with Boy Capel. Forgive me, but I love him." She rushed to the railway station and when Capel saw her on the platform, he opened his arms. It was the beginning of the most important love affair of her life.

In a benevolent gesture, Balsan still allowed her to use his apartment (they remained firm friends and she wore his amethyst ring on a chain around her neck all her life), and Coco opened her first milliner's store in 1912. A year later, with money loaned from Capel, she opened a bigger shop at 31 Rue Cambon. It was a success and in the summer of 1913, she opened her first fashion boutique in the up-market resort town of Deauville, followed by another in Biarritz in 1915.

"Mademoiselle", as she was known to her workers, was a hard taskmaster. Chanel never sketched, instead fitting clothes directly onto models for seven or eight hours straight, until the girls were sagging from fatigue. "She was tough, unrelenting," recalled Marie-Louise Deray, then a 21-year-old seamstress. "But what she came up with was sensational, both chic and exceedingly simple, so different from [contemporaries] Paul Poiret and Madeleine Vionnet."

Although her professional life was soaring, her relationship with Capel came to an abrupt end when, in 1918, he married the 25-year-old daughter of a British lord - a marriage that many believed was designed to boost his society connections. Yet despite the break-up, they remained very close. Then, one night in December 1919, Chanel received news that would haunt her life forever, when an old friend turned up unexpectedly at her front door and told her that Capel had been killed in a car crash. Standing on the stairs in white pyjamas, Chanel's face was "a grimace of agony", but she didn't cry. Instead, she asked to be taken to the scene where, on the shoulder of the road, she gently touched the wreckage and broke down in tears. "I lost everything when I lost Capel," she said 25 years later. "He left in me a void that the years have not fulfilled."

Bereft, Chanel embarked on a string of relationships and threw herself into work. In 1923, she turned 40, and celebrated by releasing her first perfume. Where other couturiers stuck to a few well-known flowers, Chanel asked laboratory owner Ernest Beaux to create a perfume using a complex blend of scents, eventually choosing the fifth of eight samples. Chanel No 5 was born.

During the Christmas of 1923, while on holiday in Monte Carlo, Chanel found love again with one of the UK's richest men - the Duke of Westminster. He courted her with love letters, flowers and fruit ferried between London and Paris. They became lovers and, again inspired by the man in her life, her line started to show English elements: knitted suits, tweed topcoats and masculine jackets. In 1926, Chanel launched one of her most enduring creations - a simple black sheath that was the first "Little Black Dress" to be worn outside mourning.

Rumours of marriage were rife, and 42-year-old Chanel was frustrated that she couldn't become pregnant. In the end, though, the couple reached an impasse: she was unwilling to give up the House of Chanel - "It was my child, I made it from nothing" - and the Duke found it unacceptable that a Duchess of Westminster be active in business.

"God knows I wanted love," explained Chanel. "But the moment I had to choose between the man I loved and my dresses, I chose the dresses. Work has always been a kind of drug for me, even if I sometimes wonder what Chanel would have been without the men in my life."

By 1931, Chanel was in the midst of one of her most golden periods, and accepted a $1 million offer from movie studio owner Samuel Goldwyn to travel to Hollywood to costume his starlets, returning to France two years later even more famous. But by the late 1930s, her success had begun to sour. Once more, she had been unlucky in love - the man she was rumoured to marry, artist Paul "Iribe" Iribarnegaray, died suddenly in 1935 after suffering a heart attack as they played tennis. She also felt betrayed by her workers, who were on strike for higher wages, and rival designers Elsa Schiaparelli and up-and-comer Cristobal Balenciaga were gaining popularity. So when Hitler invaded Poland, and Britain and France declared war in September 1939, a depressed and disillusioned Chanel abruptly closed her business.

When the Germans occupied Paris, Chanel, then 57, began her most controversial relationship - with Nazi officer Hans Gunther "Spatz" von Dincklage. Her connections with the Germans would see her unsuccessfully attempt to broker peace between the Nazis and her friend (and British Prime Minister) Winston Churchill. In 1944, after Paris was liberated, the French Resistance began the "épuration" - purges - where women who consorted with the enemy had their heads shaved, and thousands of men were executed. Spatz had fled, but Chanel was arrested and accused of collaborating. She escaped the fate of those other French women - she was released three hours later without charge or penalty - raising speculation that she knew secrets relating to Churchill.

Chanel left Paris for Switzerland after getting word that Spatz was alive, and they lived together in self-imposed exile in Lausanne. But she wasn't built for idleness and, in 1947, a newcomer named Christian Dior sowed the seeds of her comeback by bursting onto the fashion scene with waspish, corseted waists and padded full busts, petticoats and heavy skirts. An enthusiastic press dubbed the silhouette the "New Look".

Appalled at the return to constrictive fashion, Chanel, then 70, began working on a new collection - refinements of her prewar simple elegance - and reopened 31 Rue Cambon in 1954. The New Yorker described Chanel in her comeback period as "sensationally good-looking, with dark-brown eyes, a brilliant smile and the unquenchable vitality of a 20 year old".

In the following years, she continued producing her signature style, pausing occasionally to launch vitriolic barbs at whatever enraged her: miniskirts, homosexuals (although Chanel was rumoured to dabble in bisexuality herself) and even Jacqueline Kennedy. ("She's got horrible taste and she's responsible for spreading it all over America.")

By the time she turned 80 in 1963, Chanel was growing increasingly temperamental. Balenciaga recalled the end of their friendship after one of their long dinners: "When we said goodnight we were more friends than ever, or so I thought. Two days later, I read in the newspaper how she had dined with Balenciaga, that the poor Cristobal was so tired she couldn't understand how he'd be able to present his collection. I was furious ... I never saw her again."

Even so, Chanel was lonely and, despite her failing health, lived for her work. She found Sundays the hardest as the store was closed, so she would go to Père-Lachaise cemetery and indulge her childhood habit of talking to the dead.

It was a Sunday - January 10, 1971 - when she went to bed feeling unusually tired. Then her maid heard her cry out - "I can't breathe, open the window!" - and rushed to the room to find a weakened Chanel, her face bathed in tears. Lucid until the end, her last words were, "You see, this is how you die." She was 87.

She was buried in Lausanne, Switzerland, with five stone lions guarding her grave. Her status as fashion royalty was reflected in the mourners: Pierre Balmain, Balenciaga, Yves Saint Laurent and Salvador Dali. Her memory lives on just as she planned - through her clothes. "I don't like people talking about 'the Chanel fashion'," she declared. "Chanel, above all else, is a style. Fashion, you see, goes out of fashion. Style, never."