It might seem surprising that Sydney, established in 1788, is not Australia's capital. Yet the creation of Canberra in 1927 - intended to stem the intense rivalry between Sydney and Melbourne - has not affected the view of many Sydneysiders that their city remains the true capital of Australia, and certainly in many ways it feels like it. The city has a tangible sense of history in the old stone walls and well-worn steps in the backstreets around The Rocks, while the sandstone cliffs, rocks and caves amongst the bushlined harbour still contain Aboriginal rock carvings, evocative reminders of a more ancient past.

Flying into Sydney provides a thrilling close-up snapshot of the city as the aeroplane swoops alongside sandstone cliffs and golden beaches, revealing toy-sized images of the Harbour Bridge and the Opera House tilting in a glittering expanse of blue water. Towards Mascot airport the red-tiled roofs of suburban bungalows stretch ever southwards, blue squares of swimming pools shimmering from grassy backyards. The night views are nearly as spectacular, skyscrapers topped with colourful neon lights while the illuminated white shells of the Opera House reflect on the dark water as ferries crisscross to Circular Quay.

Sydney has all the vigour of a world-class city, and a population approaching five million people; yet on the ground you'll find it still possesses a seductive, small-town, easy-going charm. The furious development in preparation for the year 2000 Olympics, heralded as being Sydney's coming-of-age ceremony, alarmed many locals, who love their city just the way it is. It was not so much the greatly improved transport infrastructure, or the $200 million budget which improved and beautified the city streets and parks, but the rash of luxury hotels and apartments still adding themselves, often contentiously, to the beloved harbour foreshore. It's a setting that perhaps only Rio de Janeiro can rival: the water is what makes the city so special, and no introduction to Sydney would be complete without paying tribute to one of the world's great harbours. Port Jackson is a sunken valley which twists inland to meet the fresh water of the Parramatta River; in the process it washes into a hundred coves and bays, winds around rocky points, flows past the small harbour islands, slips under bridges and laps at the foot of the Opera House.

Taken together with its surrounds, Sydney is in many ways a microcosm of Australia as a whole - if only in its ability to defy your expectations and prejudices as often as it confirms them. A thrusting, high-rise business centre in the CBD , a high-profile gay community in Darlinghurst , inner-city deprivation of unexpected harshness, with the highest Aboriginal population of any Australian city, and the dreary traffic-fumed and flat suburban sprawl of the Western Suburbs , are as much part of the scene as the beaches, the bodies and the sparkling harbour. But all in all, Sydney seems to have the best of both worlds - if it's seen at its gleaming best from the deck of a harbour ferry, especially at weekends when the harbour's jagged jaws fill with a flotilla of small vessels, racing yachts and cabin cruisers, it's at its most varied in its neighbourhoods , not least for their lively café and restaurant scenes. Getting away from the city centre and exploring them is an essential part of Sydney's pleasures.

A short ferry trip across to the leafy and affluent North Shore accesses tracts of largely intact bushland, with bushwalking and native animals and birds right on the doorstep. In the summer the city's hot offices are abandoned for the remarkably unspoilt ocean and harbour beaches strung around the eastern and northern suburbs. Day-trips away offer a taste of virtually everything you'll find in the rest of Australia. There are magnificent national parks and native wildlife - Ku-Ring-Gai Chase and Royal being the best known of the parks, each a mere hour's drive from the centre of town. North of the centre the Central Coast is great for surfers, and has more enclosed waters for safer swimming and sailing. Inland, the Blue Mountains offer tea rooms, scenic viewpoints and isolated bushwalking. On the way, and along the Hawkesbury River , are historic colonial towns. Inland to the northwest is the Hunter Valley , Australia's oldest and possibly best-known wine-growing region, amongst pastoral scenery.