Lou Reed and New York's meat-packing district go well together. They make quite a poetic combination. Both are located around the intersection of 14th Street and 9th Avenue, from where he can peek across the Hudson to the distant suburbs of New Jersey. Both are getting on a bit: he's 61 next month and has the lines, though not for some reason the grey hairs, to prove it. Both exist on the fringes of the city's traditional bohemian hotspot - Greenwich Village is a short taxi ride to the south - and despite, or maybe because of their battered appearance, are well regarded these days by fashionable types wishing to sample a taste of the real New York.

'It'll be a disaster if this place changes,' Reed says, directing a stony glare at another building site that has temporarily pushed pedestrians off the pavement onto one of the many cobbled streets. 'This used to be an infamous dock area by the water. Now it's a park. Which is great. What's not great is the prices. It's in real danger of becoming a rich area. Down the block on 14th Street there's Alexander McQueen and Stella McCartney, and then there's the meat market. Dead cows and pigs.'

Delivered deadpan in a fruity baritone drawl, this is exactly how you would expect Reed to sound: laconic, dry, with a noticeably morbid flavour. He doesn't disappoint in terms of the look either. Everything he's wearing is black. Unusually for a sexagenarian, his trousers are made of leather; unusually for him, he seems to have left the dark glasses at home and - great news this - after a decidedly bad-hair decade, has abandoned the greasy mullet in favour of an unstructured, tousled cut that most of us haven't seen him sporting since he joined the Velvet Underground in 1965.

Friendly is not his style. Smile at him and he stares bleakly back. Joshing comments he blanks, in line with his well-documented and - given all the compliments they've paid him down the years - curious distrust of English journalists. But he's in a talkative mood today, mainly because he's excited about his latest album, The Raven (rather startlingly, his 24th as a solo artist, not including compilations), but also because he's still buzzing on life in New York. No rock star has ever been as closely identified with one city as Reed has with this fabled metropolis.

So it is a relief to discover that while he is now happily settled with his girlfriend, the performance artist and musician Laurie Anderson, hasn't been near drink and drugs for 20 years, and lists basketball and scuba diving among his recreations, the man famous for walking on the wild side has not mellowed to the point of losing his taste for urban decay. Hence this stroll through his neighbourhood. He loves its scuzzy diversity. He's not happy that there is a plan to plant a deluxe George Cinq hotel over there, and supports a community group's opposition to it. He frets that while rentals are down in the wake of 9/11, real estate here, less than a mile from where the twin towers collapsed, has got more expensive. 'We're running out of places where this can happen. Now we're down to Dunbo.' Dunbo? 'Down under the Brooklyn-Manhattan bridge.' Reed strides on, towards his favourite lunch place.

It's a French cafe-bistro called Pastis that at 1 o'clock is heaving with people who do not look like regular office workers or, for that matter, meat packers. Two of them, answering to the names of Jack and Stephen, pounce on Reed as soon as he enters. 'Are you with Lou?' the waitress kindly asks before leading me to a table by the window at which Reed eventually appears, armed with one of his unfriendly stares. 'When I started coming here there was nobody. Now it's a real scene-y place, really smart.' He orders scrambled eggs with a side order of smoked salmon, still mineral water and a cappuccino 'with no sugar, no chocolate, nothing on it'. He looks disbelievingly as I empty a sachet of demerara into an espresso. 'You want sugar?'

He makes it sound like a class-A drug; and at present, chez Lou, biochemical cravings are a hot topic because he feels he might, just might, have finally overcome the one habit he has been unable to kick since he was 14. Compared to smoking, giving up amphetamines, heroin and alcohol was a breeze. Spells attending meetings with AA and NA in the early 1980s soon saw them off. But he's been talking about quitting cigarettes for years, usually with a pack of Marlboros in front of him and one smouldering in the ashtray. Now, thanks to a Chinese herbalist called Dr Peng, he's on day 15 of a nicotine-free life, his longest period of abstinence. All he has to do, he says, is drink a cup of Peng's special tea each morning. 'And the desire to smoke has left me. Next it'll be coffee.' And then? Reed smiles. 'Oh, it'll just be a few details. You see, I hate having to have things.'Which brings us, by a scenic route, to the theme of his new album. The Raven is a two-hour-long collection of songs and texts inspired, and in parts lifted from, the works of Reed's latest favourite author, Edgar Allan Poe. No great surprise there. Many of his best-known songs have been based on books he read as an English and philosophy student at Syracuse university in the early 1960s. One of his first compositions for the Velvet Underground, Venus in Furs, was derived from the novel by Leopold von Sacher-Masoch. Walk on the Wild Side took its title from Nelson Algren's novel of the same name.

In Poe though, Reed has found more than a quarry of useful song titles. He's found a literary analogue of himself. The reason he insists that The Raven is 'the culmination of everything I've been working on' is not just down to its comprehensive summary of his musical interests, from doo-wop to David Bowie and from John Cage to Ornette Coleman; nor to its radical blend of literature and loud guitars. Poe has supplied him with an annotated version of the Lou Reed we all know, or think we know - the connoisseur of dangerous substances, chronicler of unusual states of mind, patron saint of strange compulsions. 'It's all in an essay Poe wrote called Imp of the Perverse,' Reed explains, 'where he asks why we're always drawn to things that are bad for us.'

Smoking aside, Reed has had his self-destructive instincts pretty well under control - freakishly under control, many say - for quite a while, since he married his second wife, Sylvia Morales, in 1980, in fact. Meeting the then 22-year-old British-born designer coincided with a sea change in the way Reed lived his life and, just as importantly, managed his career.

Along with the drink and the drugs, he gave up full-time residency in New York City and split his time between his apartment in Greenwich Village and a farm in Blairstown, New Jersey, where he took up fishing on a man-made lake. Critics immediately sensed a deterioration in the quality of his music, one describing 1983's Legendary Hearts as 'the most insultingly appalling release in years'. But by then, Reed had declared war on the press and had all but stopped speaking to them. To this day, he will only talk to the media when he has something new to sell.

The times when, in his heyday as a glam-rock icon, he would allow the American rock journalist Lester Bangs into his hotel room for drunken all-night bitching sessions are, apparently, gone for ever. For the past 20 years, hacks comparing notes have been disconcerted to discover that Reed often delivers virtually identical paragraphs to each interviewer. The dawning realisation that this venerated rock'n'roll poet is, upon occasion, little more than a talking press release can be discouraging, not to say weird. (Subjects deemed off limits include his childhood, family, relationships, the Velvet Underground and Victor Bockris's unauthorised, unflattering biography.)

But by the time he and Morales battened down the hatches, it was too late. Trying to pretend that people want to hear about what guitar strings you use, and how the stereo panning works on track three - topics now Reed finds of genuinely consuming interest, and hopes we do too - won't wash when you've spent the past 15 years advertising yourself as a flamboyant, arty bisexual with a weakness for hard drugs, strong liquor and lady-boys. Particularly when you've written all of that and more into a clutch of the most catchy and memorable songs of the rock era.

They remain the secret of his success, as underlined by the all-star cover version of his song Perfect Day, from 1973's Transformer, which gave him his first UK No 1 in 1997. It isn't that he's trading on past glories: his 1989 album New York was a critical and commercial hit, and the consensus is he's been on form ever since. But the reason why he can sell out two nights in the Albert Hall, as he did in 2000, and will shift respectable quantities of the rather unwieldy Raven project, is not just because people still like what he does but because they're still intrigued by who he is.

Working that out has never been easy. Nobody understands the potency of enigma in the construction of a pop persona better than Reed, and his CV has been liberally spiked with misinformation. For a long time, it was believed that he was born Louis Firbank, until the Velvets' drummer, Maureen Tucker, insisted that Reed was the family name. Lewis (not Louis) seems to have been the eldest of three children - though his younger sister and brother have never been sighted - and they grew up first in Brooklyn and then, as Reed Sr's accountancy business flourished, in the coastal suburb of Freeport on Long Island.

How he got along with his folks is a real teaser. When he was 17, they sent him to a psychiatric hospital for nonconvulsive electrotherapy, three times a week for eight weeks. He later claimed this was designed to combat growing signs of homosexuality, though a neighbour quoted in the Bockris biography says his parents just wanted their rebellious, pop-music-obsessed son to behave. Either way, the relationship can't have been that bad, as he invited Mum and Dad to the Velvet Underground's last concert in 1970, and then, as a 28-year-old arts graduate with a stalled career as a musician to fix, moved back to the family home.

You can't choose your parents but you can select your role models, and Reed's choices have been revealing. Andy Warhol we know about. The man in black, whose patronage of the Velvet Underground lent them credibility as the sound pioneers of pop art, taught Reed plenty about how to project a mysterious aura, not least through the perpetual wearing of sunglasses indoors. Bowie was another high-profile guide, steering him out of the doldrums of his post-Velvets marriage to a suburban secretary called Bettye Kronstadt into a world of glam rock, costumed bisexuality and, in due course, a bizarre relationship (that lasted until Morales happened along) with a transsexual Mexican hairdresser who answered to the name of Rachel.But his great mentor, the man he calls 'my teacher, friend and the person who changed my life', he met when he was a college freshman in upstate New York. In his youth, the writer Delmore Schwartz was hailed as a literary lion in the making by T S Eliot and Ezra Pound. By the time he taught Reed at Syracuse, he was a model of unfulfilled promise - a 48-year-old drunk with an amphetamine habit, but enough charisma to inspire the impressionable Lewis with his concise, philosophically-tinged tales of urban life.

Schwartz thought the rock'n'roll Reed loved was crass 'catgut music', but it was his example of mixing high and lowbrow idioms that gave Reed the idea 'to take a poet or novelist's approach to songs, so the lyrics could stand alone but with the fun of the two guitars, bass and drums to enhance them'. It probably helped their rapport that they shared a Jewish upbringing in Brooklyn, and had both endured crude psychiatric treatments.

It was Schwartz who first introduced Reed to a side of New York not normally frequented by middle-class kids from Long Island. Sacked from the university, he spent his final years holed up in a seedy hotel near Times Square, convinced, in a fit of paranoia, that the Republican honcho Nelson Rockefeller was after him. The last time Reed saw him, Schwartz mistook him for a CIA agent. When he died in 1966, Reed was in hospital in San Francisco. A drug he had injected 'froze all my joints. So I checked out of the hospital and went to the funeral'. Cue for a song perhaps? Well, yes actually. After paying his final respects, Reed completed what was to become one of the Velvet Underground's most notorious tracks, Heroin.

Looking back on his days as an enfant terrible, Reed, rather naively perhaps, feels it was all a misunderstanding. 'I was horrified when the stuff came out, that people were offended by it and thought I was causing some kids to become drug addicts. I thought, 'What happened to freedom of expression?' I figured, if you liked rock music and wanted to stick with it, you wouldn't wanna hear lyrics you may later find meaningless or repellent.' He points out that, street though he may be, he tries never to use slang that will date his songs.

To many fans, the most challenging move of his early career wasn't all that singing about hookers and dope dealers or even being photographed kissing Bowie in public - it was his 1975 double LP, Metal Machine Music. An hour of feedback loops and random electronic noise, it silenced the glam army who had been singing happily along to Walk on the Wild Side. The universal bafflement was only leavened by a suspicion that Lou might have been trying to end his relationship with RCA.

'That was crazy. I wasn't doing something negative. I do melodies but I also like feedback. It's like John Cage [the avant-garde American composer and theoretician] said: every sound can be music. And I certainly wasn't trying to get out of my record contract.' Reed cracks a rare grin. 'Though I know there are contracts now which have a Metal Machine Music clause where artists promise never to make an album like that.' The grin broadens. 'It's come up in my contracts also.'

And yet, like most of the outrageous moves Reed has pulled off, Metal Machine Music is now held to be worthy of serious attention and is an acknowledged part of his repertoire. It even features in a segment of The Raven. It's hard to resist the conclusion that Reed has been steadily moving from a cult-ish underground provocateur into a figure of, well, respectability.

This train has been coming ever since America's Literary Council for Small Magazines gave him an award for his poem The Slide in 1976, picked up speed in 1991 when the Czech president, Vaclav Havel, presented him with a handprinted edition of his lyrics that had been circulated among dissident Czech intellectuals during the Russian occupation, and reached a climax in 1996, when the Velvet Underground were inducted into the Rock'n'Roll Hall of Fame in Cleveland. Reed says he never wanted it any other way. 'People say Lou's not so shocking now. Hey, Lou wasn't so shocking then. I wasn't ever based on shock.'

Maybe. But compared to the days when he used to hang around in gay bars in Greenwich Village with Rachel, shooting speed and basking in his reputation as one of the godfathers of punk, life is a lot more settled. In Laurie Anderson he has found somebody he has described as 'the love of my life, my soul mate' - and a woman who, unlike Sylvia Morales, does not want children.

They make a strikingly good downtown couple, work wise, both linking words and music in unorthodox ways. Reed denies that the format of The Raven was suggested by Anderson's similar adaptation of Moby Dick, which toured the world as a stage show in 1999-2000. But as lunch at Pastis winds down, he discloses one reason why they get along so well. Unusually for a female artist, Anderson shares his bloke-ish fascination with electronic gadgets. 'Her knowledge of high-tech programmes and keyboards has stood me in good stead. If you've got a question about any techy stuff, she'll give you a real straight answer.'

Which reminds him, it's time to head back to SoHo and the office of his company, Sister Ray Enterprises, to talk to a guy about the electrics. Tonight, he and Anderson are hooking up with Bowie and his wife, Iman, at the premiere of Gangs of New York. Then they might go out for dinner.

You can't help thinking - and saying - that this all sounds rather chummy, civilised, and not terribly, you know, Lou Reed. He agrees. 'I used to seek out extreme situations and live through them. Now I try to avoid them. I've discovered I'm a person who works best when there's no tension.' He offers one of those sporty, shoulder-high hand clasps that regular American guys employ as greetings, smiles and goes for his cab.