The billionaire shipping magnate Knut Kloster Jr seems to have realised that there was a certain arrogance involved in naming his new ocean-liner the World: as if to pre-empt the wrath of heaven, he had it blessed not by one priest but three. At the launch ceremony in Norway two years ago, they paced through the beige-and-gold lobby, sprinkling the shiny wooden floor with a mixture of holy water and champagne. "This is not a private yacht, nor is it a cruise ship," Kloster announced. "It's a vacation lifestyle concept that goes beyond anything that has ever existed."

The World - 644ft long, 12 decks high, built at a reported cost of $532m - redefined the meaning of exclusivity. For prices from £1.5m to £5m and above, the ultra-wealthy could purchase homes on what was, in essence, a floating city-state, complete with shopping streets, six restaurants, the only full-sized tennis court at sea, a church, several pools, one of which doubles as a dancefloor, a running track, a 7,000 square foot spa, a helipad, a retractable marina, and one staff member per resident. Buyers were assured fortress-like privacy: in the earliest days, a few reporters were ushered on and off, strictly supervised and forbidden from approaching residents - but then, after the initial fanfare, silence descended, and the World set sail, rarely stopping anywhere for more than a few days, on an endless, globe-spanning, year-round holiday, a permanent voyage to paradise.

Which was when the trouble started.

"I am a man who has spent his life doing things that nobody has ever done before," declares Jim St John, the jowly Rhode Islander who now runs the World, striding through the ship's deserted lobby to the sound of an automatic grand piano playing Elton John medleys. Underemphasising his own achievements isn't St John's style, but even for him, the World has been a daunting challenge. After it left the media spotlight, the luxury lifestyle the vessel's owners had been promised didn't take long to sour. It started with whispers that the wrong sort of people were finding their way on to the ship. It culminated with some of the richest people on the planet facing the loss of their homes, and millions of dollars - prompting an unprecedented on-board rebellion it might only be slightly stretching a point to call a mutiny.

There is something inescapably eerie about the World, which is due to set sail today from Greenwich, at the end of a tour of the British coast. I met it at Southampton docks on an alternately grey and sparkling morning, its sheer gleaming vastness impossible to process simultaneously with the low-slung warehouses on shore. Inside, it is eerier. "We did have some friends come on board who described it as a ghost ship," says Peter Beckwith, the property developer, who owns one of the apartments. (We spoke afterwards; as part of an arcanely detailed pre-visit agreement, the Guardian was banned from talking to residents on board.) "But for me it's just a terrific place to get some reading done."

The World, technically speaking, is "overbuilt" - it can accommodate thousands more than the 100-200 residents usually on board. The result is a pervasive emptiness, every where from the main restaurant, Tides, to the upmarket delicatessen, and a state-of-the-art internet cafe, where a 1,500-piece jigsaw showing wild horses waited, one-third complete, for somebody to come and finish it. Only a handful of residents, mostly elderly, all impressively tanned, were visible, dining in ones and twos. Recently, the ship has started to close individual restaurants on a rotating basis, in an effort to enhance the ambience of the others.

Who would want to live here, and who actually does, is treated as a secret by Residensea, the Bahamas-based company set up to run the ship. But some hints have leaked out. About 40% are North American and 40% European; only a hardcore of 10, St John estimates, are at sea year-round. (The others have to give 24 hours' notice whenever they want to show up.) Their apartments, available in one of four basic designs, resemble beige and brown high-end business hotel suites; the smaller ones barely have room for a kitchenette in the corner; larger versions feature a jet pool in the bathroom. Food and other costs are included as part of a service charge understood to start at more than £50,000 per year.

Contrary to myth, the residents aren't tax-dodgers: every resident must provide another address for tax purposes, and they are unlikely to be short of alternative addresses. Rumoured residents have included Madonna and Arnold Schwarzenegger, but the truth seems to be that the World's buyers aren't famous: they are the A-list above the A-list, too wealthy to need the public eye.

"Madonna would hate this ship, and anyway, if she bought, the other residents would buy her apartment back. You don't want that kind of commotion," St John says over lunch at Tides. The World, he insists, was not established for fleeing the media - "it's [for] seeing the world. But seeing the world and going home at night and having a hot shower and a good meal. You don't have to eat beetles."

From the start, though, Kloster's vision of an elite community untethered by the restrictions of dry land began to run into problems. Residensea and the shipbuilders disagreed over the quality of the finish, and the shipyard booked a loss. The public seemed unimpressed, too: when the ship docked in Greenwich in April 2002, graffiti swiftly appeared reading "Fuck off the World!" And in the wake of September 11, the ship, commissioned and marketed before the attacks, became a floating anachronism. Economic uncertainty, coupled with the fear that the World might itself become a target, meant that "after September 11, [buyer interest] stopped," its then-captain was reported as saying. By mid-2002, at least 30 of the 110 apartments were reportedly still unsold.

Under pressure from the ship's Norwegian shareholders, the nervous operators focused their efforts on an aspect of The World that had always sat awkwardly with Kloster's plans: renting out apartments to wealthy cruisegoers at a cost of around £1,000 per couple per night. "They just tried to fill the suites with whoever would take the space," Beckwith says. "People who were looking for a cruise-line-type holiday."

It is hard to convey how violently the residents and operators of the World reject the notion that it is a cruise ship. "This is the antithesis of a cruise ship!" St John says. The World meant gilt-edged tranquillity and global exploration. Cruise ships meant something else - "bingo and Captain's cocktail parties," in the sniffy words of one early Residensea sales document. The wrong sort of people, in other words - and often corporate guests, who weren't even wealthy. "They weren't paying, the companies were paying," one Residensea employee says. "They were just there to have as good a time as possible."

Late 2002 and early 2003 are remembered on board with a particular shudder. "There was one guy," Beckwith recalls, "who got on at San Francisco at 11.30 in the morning, and by 1.30 in the afternoon, he'd fallen down the stairs so blind drunk that he'd broken his leg. They were allowed free booze, you see. As much booze as they wanted! It wasn't the best wine on board, but I mean, you know - alcohol's alcohol."

Such incidents lodged themselves stubbornly in the World's collective memory. The 2002 Monaco Grand Prix was an especially low point. "Part of the idea was that the ship would go where major events were happening," says Nikki Upshaw, a Residensea executive. "I mean what could be better, right, than being there? But then we realised that they didn't want to be in these places when other people were there for a big event. They wanted to be there when other people weren't there."

Not far from the World's multi-denominational chapel, Harmony - which boasts interior design by a former member of the Norwegian pop group A-ha - there is a simulated golf course. Players tee off in front of a room-sized screen, on which a three-dimensional image of the course is projected. When the ball hits the screen, it turns into an animated version of itself, and the computer follows its onward journey. (Up on deck, there's a putting green with biodegradable balls.) Inspirational posters showing waterfalls and mountain summits line the walls, praising the virtues of PASSION, SUCCESS and PERSEVERANCE. "The achievement of your goal," one reads, "is attained the moment you commit yourself."

By the middle of last year, the banks on whose loans Residensea relied were beginning to panic, and the residents decided to commit themselves. The original shareholders, Peter Beckwith estimates, had already lost $100m. "The banks then foreclosed on them, and they ran the ship ... the banks then lost, say, another $150m, and would have foreclosed on all of us, which would have meant us losing our apartments. We'd have lost everything."

A series of urgent meetings were held to discuss the crisis. According to confidential documents obtained by the Guardian - not from Beckwith - the residents complained of "mounting frustration and disillusionment". They wondered "how can anyone afford to own and operate this ship with so many crew and so few passengers or residents on board," and said new buyers believed "that they are being asked to purchase a defective product."

Eventually, they agreed upon the most radical solution possible: taking over Residensea themselves. By the end of last year, Robert Riley, the president of Residensea, had departed his post, and for an undisclosed sum, the residents bought the World from the banks. Now they get to decide who can buy or rent apartments, and where the ship's itinerary will take it. Occupancy is understood to be nearly 100%. "This is what we are, and what we were always intended to be," says St John, who was brought in to manage the new company. "The ship just went through its teenage years."

St John has a theory about the travel business that he enjoys expounding; and it explains, he believes, where the World went wrong. "It's all about selling expectations," he says. "Selling the right expectations. If a hotel room is overlooking a bush, don't tell people it's got a partial ocean view if they hang from the girders. Tell them it's looking at a bush." Different people were expecting different things. The holidaymakers wanted a cruise - "a guy books a holiday on a cruise ship, gets told it's the best damn cruise ship in the world, gets here, and it's not a cruise ship!" - and the residents just wanted a bit of peace. Recently, St John said, he had dinner with Kloster, whose main relationship with Residensea now is simply owning property on the ship. "We were looking over some of his old printed materials, and we realised that now we're doing exactly what he dreamed. For people to live in their own home, while their home moved around the world."

So the World sails on, having regained an even keel, a defiantly inaccessible symbol of a lifestyle most people can only guess at. In some ways, though, the rich may not be so different after all. Leaving the ship at Southampton, I bumped into two staff members on the dockside, loaded down with shopping bags full of food. "It's not for us," they pointed out. "It's for the delicatessen." And they hurried off, the logos on the sides of the bags in clear view. It was heartening to learn that however removed from the rest of us they may seem, the billionaires of the World, whether they know it or not, get their groceries from Asda.