IN a courtyard at the University of Vienna there was laughter as graduates posed for photographs, but as noon approached, an uneasy calm descended and guests left en masse. Improbably, one of Europe's most revered seats of learning has become a place of violence.

The controversy surrounds a statue called Siegfried's Kopf. Portraying a warrior from German mythology, the monument is a symbolic figure for Austria's far right, so each week fiercely nationalist students, called Burschenshaften, gather to pay homage.

But for months now there has been fighting on campus as other students protest at what they view as an unacceptable show of support for a despised Nazi past. In order to prevent violence, the university tried to remove the statue but were unable to because it is protected by the state. As a compromise, the piece was relocated from the main entrance to the courtyard where it now sits in a glass case engraved with the stories of Jews persecuted by Nazis during the 1930s; in the eyes of the far right an act of desecration.

On our recent visit, the Burschenschaften had been banned from visiting the statue and at the main entrance to the university armed police stood guard as they handed out leaflets to protest. Dressed in their uniforms, the Burschenschaften resembled colourful bandsmen of an age gone-by and are a far cry from the shaven-headed thugs normally associated with neo-Nazism.

As the protest continued other students gathered and there was clearly tension in the air. One girl claimed the Burschenschaften were part of a group of men who attacked a student march against fascism outside the Austrian Parliament the week before. Whispering, she added: "The Nazis are back in Austria."

In many respects, this issue provides a microcosm of Austrian politics, in the wake of an election last autumn that saw the far right take one third of the nation's vote. While many Austrians say it was a merely protest vote, others are more fearful of the subtext.

Drumming up hatred of foreigners and campaigning against the "Islamisation" of Austria, the Freedom Party (FPO) and Alliance for the Future (BZO) jointly secured massive public support - 29% per cent - in a result viewed as a horrifying development by many people across Europe.

Both parties ran xenophobic campaigns, particularly the FPO who pledged to set up a ministry to deport foreigners and whose leader, Heinz Christian Strache, described women in Islamic dress as "female ninjas".

More sinisterly, the FPO wants to revoke the Verbotsgesetz, an Austrian law enacted in 1947 that bans the promotion of neo-Nazi ideology.

Emboldened by this, right-wing extremists are becoming more arrogant, and violent clashes have taken place on Austria's streets between anti-fascists and neo-Nazis. Leftist concerts, meetings and demonstrations have been targeted and Muslim graves desecrated, and as the recession deepens there is growing concern over where Austria could be heading.

Last month, the Organisation for Security and Co-operation in Europe expressed concern that the economic crisis may be prompting violent hate crimes, and only a few days ago Amnesty International issued a report that accused Austria's police force of institutional racism.

Austria has been here before. In 2000, the EU imposed sanctions on the nation for seven months after the FPO entered a coalition government. At the time the FPO was dominated by Jorge Haider, who had praised Hitler and the SS. Haider left the FPO to form the BZO and was killed recently in a car crash.

The Austria-Nazi controversy stretches back to Kurt Waldheim, who headed the UN from 1972 to 1982 but whose career was overshadowed by a scandal about his secretive second world war service.

Today Austria's neo-Nazis will attempt to commemorate Adolf Hitler's 120th birthday, which falls tomorrow, in his birthplace, the town of Braunau. A march was banned over fears of violence but the organisers appealed and many people are expected to turn up regardless.

Elsewhere in Austria and other European nations, neo-Nazis are expected to hold secret rallies to mark the date. In the town of Usti nad Labem in the Czech Republic, for example, up to 10,000 people were expected to take part in marches this weekend, ostensibly in remembrance of the bombing of Usti by the Allies in April 1945.

Neo-Nazi activity in Austria is monitored by Vienna's Documentation Centre of Austrian Resistance (DOW), an organisation founded in 1963 by former resistance fighters. Drawing two circles on a piece of paper to explain, researcher Heribert Schiedel talked about the rise of the far right in Austria.

"In the circle on the left you have legal parties such as the FPO. In the circle on the right you have illegal groups such as Blood and Honour. Two distinct groupings who pretend they are separate." He drew another circle linking the two.

"This circle links the legal and illegal," he says. "This signifies the Burschenschaften, right-wing brotherhoods founded in German universities. They have been long been associated with fascism and have a history of terrorism. Adolf Eichmann, Rudolf Hess and Heinrich Himmler were Burschenschaften - as are prominent members of the FPO in parliament.

"Neo-Nazis around the world are now looking to Austria for their lead because of the election result. They neo-Nazis believe their time is coming again. There is a new European right and its core is right here in Austria."

The Burschenschaften were banned by the allies after the second world war but reformed in the 1950s. In 1987, Olympia, one of the most extreme fraternities, nominated Rudolf Hess for the Nobel Peace Prize and it was Olympia who invited the controversial British historian David Irving to Austria in 2005 when he was arrested for denying the Holocaust.

Senior members of the FPO are Burschenschaften, including Strache and Martin Graf, who was elected deputy president of the Austrian Parliament after the election. Ahead of his selection, Vienna's concentration camp survivors wrote to MPs asking them not to vote for him, but 70% of parliament backed him. The move caused outcry and was condemned by, among others, Dr Efraim Zuroff, from the Simon Wiesenthal Centre in Jerusalem. He said: "Our concern stems from the well-known ties Graf has with extreme right groups like the Olympia student union."

The FPO's Andreas Molzer is also Burschenschaften and has been trying to create a far-right European block ahead of June elections to the European Parliament. Molzer, an MEP, paid a clandestine visit to London last year to meet the BNP leader Nick Griffin.

Graf, Strache and Molzer have always strenuously denied having any links to far-right extremist groups and the FPO says it only wishes to revoke the Verbotsgesetz because it believes in freedom of expression. Strache told Sunday Herald: "I have very often distanced myself from National Socialism, fascism and any other totalitarian ideologies." Graf said he "deplored" racism and anti-Semitism.

But as with Waldheim and Haider before, Strache has been at the centre of controversy and pictures surfaced last year showing the FPO leader wearing army fatigues and clutching what appeared to be a gun in a forest. The images of him were allegedly taken at a neo-Nazi training camp in his youth. Strache denied this and said the images were from a day out paintballing.

There was also a furore over a photograph of him giving a three-fingered salute - claimed to be a secret sign for far right extremists - but Strache dismissed this saying he was ordering beers in a bar. He is now referred to as "three beers Strache" by many Austrians.

The FPO has tried to distance itself from extremism recently but the party was founded by two former SS officers, Anton Reinthaller and Herbert Schweiger. Schweiger is still politically active and I met him at his Austrian home a few weeks before he was due in court charged with promoting neo-Nazi ideology.

Still remarkably sharp-minded, Schweiger was a lieutenant in the Waffen SS Panzer Division Leibstandarte Adolf Hitler, an elite unit originally formed before the second world war to act as the Führer's personal bodyguards.

It will be the fifth time Schweiger has stood trial for breaking the Verbotsgesetz law. He has been found guilty twice and acquitted twice and it quickly became apparent that little had changed in his mindset since his Third Reich days.

"The Jew on Wall Street is responsible for the world's current economic crisis. It is the same now as in 1929 when 90% of money was in the hands of the Jew. Hitler had the right solutions then," he said.

Schweiger - described to me as the "Puppet Master" of the far right - is a legendary figure for neo-Nazis across the world and he claimed the far right would soon have another leader like Hitler. If Schweiger was a senile old Nazi it might be possible to dismiss him as a harmless old man. But Schweiger remains a powerful man. His raison d'être is politics. He was a founding member of three political parties in Austria - the VDU, the banned NDP and the FPO - and he has given his support to the current leader of the FPO.

"Strache is doing the right thing by fighting the foreigner," he said.

As a "politician", Schweiger is of the school that believes the bullet and the ballot box go hand in hand. This belief goes back to at least 1961, when he helped to train a terrorist movement fighting for the reunification of Austria and South Tyrol, now part of Italy.

"I was an explosives expert in the SS so I trained the Burschenschaften how to make bombs. We used the hotel my wife and I owned as a training camp," he said. The hotel he refers to is 50 yards from his home.

Thirty people in Italy were murdered during the campaign. One man convicted for the atrocities, Norbert Burger, later formed the now-banned neo-Nazi NDP party with Schweiger. Schweiger's involvement earned him his first spell in custody in 1962, but he was acquitted.

Despite his age, Schweiger still travels widely in Austria and Germany to teach "the fundamentals of Nazism" to underground cells of hardcore neo-Nazis who, over the past three years, he says, have started to infiltrate political parties such as the FPO. Indeed, one of his protégés was elected last week as a senior official to the right-wing German National Democratic Party's (NPD).

This caused a furore and the German weekly Die Zeit said Andreas Thierry's election was "a win for Hitlerists in the fight over the NPD's future direction". DOW referred to Thierry as "a neo-Nazi from Carinthia".

Thierry is well-known in Austria following publication of the photos showing Strache in his camouflage military uniform. Thierry was revealed to have been one of Strache's "paintball" partners.

Austrian journalist, Wolfgang Purtscheller has spent his career documenting Austria's far right at great risk to his life. His summary of the situation in Austria is succinct.

"You have people like Schweiger - the puppet master in the mountains for half a century - able to form political parties while teaching people to make bombs, and the Burschenshaften with its history of terrorism and links to the mainstream parties. These are the intellectuals who hold the positions of power in society, in the police, the judiciary and in parliament. The neo-Nazis have learned by the mistakes of their past and are now working to build public support within the mainstream parties. Imagine what could happen if the FPO gets rid of the Verbotsgesetz," he said.

At the University of Vienna one of the Burschenschaften students brought Purtscheller's comments into sharp focus. "Muslims and immigrants are destroying our way of life. We are German-Austrians. We want a community here based on nationalism. We must fight to save our heritage and must fight for our culture. We are protesting that our freedom of speech is under threat," he said.