There are two types of holiday you can have in Phuket: you can lie on the beach, eat exquisite Thai food, have several suits made by skilful tailors for bargain prices and go on day-trips that lead you to a magical wonderland of such peace and beauty - a soul-searching experience. Alternatively, you can lie on the beach, eat fish and chips, watch bar-girls perform anatomically-defying tricks and get out of your head on cocktails at £1 a throw.

Since the Foreign & Commonwealth Office announced that they had intelligence reports to say that Phuket could be a future terrorist target, both types of holidaymaker have been reconsidering their plans. At the end of last month, the beginning of the high season, many people working in the tourist industry were saying it was the quietest November they could remember. Hotel occupancy, usually around 80% or more at that time, was down to 50-60%. In one case - the Baan Sukhothai hotel in the heart of Patong, Phuket's brashest and noisiest town - it was just 25%.

Larger hotels have been more affected as big groups have cancelled. One hotel manager told me he'd had 3,000 room nights of cancellations since the warning, including the whole cast and crew of a film. It's not just the hoteliers who are feeling the pinch, it's the stall-holders, tailors and bar-girls, too.

On a Saturday evening earlier this month in Patong - which many people see as being the equivalent to Bali's Kuta Beach, and hence the most likely target if there is one - the elegant and expensive Baan Rim Pa restaurant is fully booked. The cosy open-sided building is perched on cliffs over the sea and serves great cocktails. The food is tourist-Thai and not as good as the setting, but business doesn't seem to have been affected - you still need to book in advance.

After dinner, I take a walk around town. At 9pm, in the throng of the nightlife area, the high-rise, 248-room Royal Paradise Hotel has two singers performing to an empty bar. Around the corner, in the pedestrianised Paradise-Gay street, a row of bars with outside seating, loud music and flashing neon lights has barely a single customer. Young men, some in drag or shirtless, beckon me to take a seat. "We don't have any customers," says 30-year-old Lay, who earns £50 a month plus "little little" in tips.

However, in Bangla Road - the girly-bar area - the little row of open-air bars in Crocodile Road is heaving with European tourists sitting at tables and gawping at ladyboys dancing on a podium. But past the first few tables, the other bars further from the dancers are empty. A doorman at one of the bars, says "It's not good business this year. Everyone's afraid there'll be a problem like Bali."

A few yards away, past shops selling cheap CDs and fake Gucci bags, a man on the seafront road sells life-like rubber masks. Bush, Saddam and Bin Laden are the top-sell ers. Opposite, outside the Banana Night-Club at 10.30pm, Sean Whitehead, 32, and Carmel Gearon, 26, both from Swindon, are drinking beer and waiting for the club to get lively. "This club's highly recommended by Lonely Planet," says Sean. However, the guidebook is wrong about it not getting busy until 3am. Since last year, all clubs in Thailand close at 2am.

Sean and Carmel have been travelling for several months and are unaware of the FCO advice. "It wouldn't have mattered even if we'd known," says Sean. By midnight, the club is pumping and the dance floor is full.

But Phuket isn't all neon and noise. At 570 sq km, it is Thailand's largest island. Away from Patong's clubs and bars, there are tranquil hotels with private beaches where the ivory sand is soft and the gently lapping sea is warm and blue. Coddled in a luxury world of spas and private swimming pools in hotels with security barriers at the driveway, it's impossible to feel anxious, even if you're of a nervous disposition.

"I didn't want to come to Phuket but my girlfriend persuaded me," said 34-year-old Maile Rehnberg from Jackson, Wyoming. They were spending three days in Phuket, staying at the small 40-room, upmarket resort of Amanpuri, considered by many to be the best on the island. It costs from $700 per night, room only. "I'm not going to go on any day-trips," his girlfriend says. "I'm just enjoying the safe haven here."

If, like all other holidaymakers I come across, you're happy to go on day-trips, there are some very special ones. A starlight trip with John Gray's SeaCanoe is a spiritual experience. After an hour's boat ride to the weird, overhanging limestone karst islands of Phang-Nga bay, you paddle around the islands in inflatable canoes and squeeze through tunnels into a forgotten world of jade lagoons in the middle of the uninhabited islands. If you wish, you can do longer trips and camp on empty beaches with a Thai guide and a cook. Amanpuri is almost as peaceful and beautiful an experience as the canoe trip, but despite being remote from Patong, people have still cancelled.

At other hotels around Phuket, the story is the same. At the five-star Dusit Laguna, on the long, sweeping bay of Bang Tao, where no buildings are visible from the beach and the sunloungers are just one row deep, only 10 people occupy the 92 pool-side loungers on a sunny Monday afternoon at the beginning of December.

Rossarin Kuakool was selling drinks and ice-creams on the beach. "Last year full, full, full," she said. "This year no good: no money, no honey," she laughed.

Sheila Boardman, from Oxford and in her 60s, is on holiday with her husband, Brian, and enjoying the extra peace. "This is our 22nd trip to Phuket, and this is quieter than we've seen it at this time." Like most holidaymakers I spoke to, Sheila and Brian had been warned by their travel agent of the FCO advice but, like most others, only equated any risk with Patong, especially "rowdy clubs and bars".

Some holidaymakers have relocated from Patong to hotels at other locations, and some are deciding not to visit the town, which has road-blocks manned by armed police on every approach road.

Others are determined to enjoy the nightlife. "I'm not scared," says 34-year-old Tony Coyle from Dublin, who is travelling and working in Thailand. "I'll be going to Patong. You can't live under the fear of terrorism." He is a cook in a cafe in Panwa village, to the south of the island. "My boss is a Muslim and there's no problem. He works with a Buddhist and a Christian. We all work together as a team."

The diversity of the island's faiths, and the cooperation between people and reliance by all on tourism are often cited as reasons that residents didn't believe terrorism could happen. "We all live together happily," says Hola Nimit, 31, a Muslim taxi driver in Panwa. This is an opinion echoed by Anupharp Thirarath, director of the Tourism Authority of Thailand for the southern regional office, which includes Phuket. "Phuket is safe," he said. "London is more dangerous."

In Panwa, although nearly half an hour's drive from Patong, the four-star Cape Panwa Hotel - at which Leonardo di Caprio stayed while filming The Beach - usually has 80% occupancy in November. This year it was 52%. It's a hotel that is popular with the British, which is perhaps why it has been particularly hard hit. It seems that the British - who come third after Taiwanese and Germans in the island's visitor arrivals - have been scared away more than the Asians.

The peak season of New Year looks set to be busy as usual, with many hotels reporting their usual 100% occupancy, but the rest of the high season through to March seems an uncertainty as people leave it as late as possible to book holidays. One thing is certain - few hotels are using price as a means to tempt people, believing that security issues and price are not connected.

If you're expecting bargains, you may be disappointed, but if you're looking for empty sunloungers for a last-minute holiday this winter, Phuket could be the place.

When darkness had fallen on the SeaCanoe trip, we paddled through a tunnel and into one of the lagoons. Stars shone overhead in the circle of black night, fireflies flashed in the cliffside jungle and, most magical of all, the sea glowed with phosphorescence. In silence, we threw on to the sea "kratong" - floating Buddhist prayers of orchids, lit with candles and incense - that we had made. Let there be peace.

Way to go

Getting there: Travelmood (0870 0664556) has 10 nights in Phuket, staying at Cape Panwa Hotel. For departures between January 17-March 20, the price is £829 per person based on two sharing including transfers and taxes.

Where to stay: For Amanpuri, you can book direct at www.amanresorts.com or through an operator such as Carrier Far East (01625 547050).

Further information: John Gray's SeaCanoe. Tourism Authority of Thailand (020-7925 2511). For the latest Foreign & Commonwealth Office advice phone 020-7008 0232.

Country code: 00 66.
Flight time London - Phuket via Bangkok: 11hrs, 40 mins.
Time difference: + 7hrs.
£1= 63.44 Thai baht.