Let's just set the scene for the argument. Tommy Lee Jones is skulking around in the garden, in a suspiciously Man-at-C&A suit. Behind him, a little way up the red tarmac pathway, insanely rich people and their paid retainers are eating on the terrace of the Hotel du Cap, where lunch for four can set you back £10,000. If you have the nice wine. I'm in a wooden cabin perched on the cliff-side with William Friedkin - director of The Exorcist and The French Connection - wondering if, as some Arab groups have claimed, his new film is to Islam what The Eternal Jew is to Judaism. Or whether he's capable of shouting any louder in his attempts to persuade me that it isn't.

Let's just set the scene for the argument. Tommy Lee Jones is skulking around in the garden, in a suspiciously Man-at-C&A suit. Behind him, a little way up the red tarmac pathway, insanely rich people and their paid retainers are eating on the terrace of the Hotel du Cap, where lunch for four can set you back £10,000. If you have the nice wine. I'm in a wooden cabin perched on the cliff-side with William Friedkin - director of The Exorcist and The French Connection - wondering if, as some Arab groups have claimed, his new film is to Islam what The Eternal Jew is to Judaism. Or whether he's capable of shouting any louder in his attempts to persuade me that it isn't.

The cinematic Arab has never been a very attractive figure - unless, like Valentino or O'Toole, he's a caucasian actor dragged up in all that sexy white robing. In the 1920s he was a swarthy Sheik, wiggling his eyebrows and chasing the heroine around a tiled courtyard. After the 1973 oil crisis, he became an inscrutable, avaricious bully - a Ray-Banned variation on the stereotype of the Jewish moneylender. More recently, however, he's filled the vacancy left by the collapse of the Soviet Union. Now that KGB members are all on the dole or hawking Marlboros on the streets of Nizhniy Novgorod, the Arab nations - and the Islamic world in general - have become the new stock enemy, a powerful and unreasoning force in True Lies (1994), Executive Decision (1995), GI Jane (1997) and The Siege (1998) - in which Bruce Willis rounded up Arab Americans in an attempt to stop a Hezbollah-type terrorist group blowing up New York. Even The Insider (1999) - a film about corruption in the tobacco industry, for heaven's sake - tacked on a Syrian prologue in which Al Pacino took on a pack of mad-ish mullahs.

And Rules of Engagement? "This film is absolutely off the scale," says Hussein Ibish, communications director of the American-Arab Anti-Discrimination Committee, a Washington-based pressure group. "I've never seen anything quite so vile. I felt like I was being physically beaten, which is a reaction I've never had encountering a work of art. It was mind-bogglingly vicious. I'm amazed that a major American entertainment company would actually release such a thing." He shouldn't be too amazed: the film took $15 million on its opening weekend, a fact which doubtless pleased the chair of the Paramount Pictures' Motion Picture Group, Sherry Lansing - who just happens to be married to William Friedkin.

So, to summarise the plot: it's Molotov cocktail hour at the American embassy in Yemen. The ambassador (Ben Kingsley) is cowering under his desk as a mass of howling Yemenis hoick petrol bombs at his residence. Enter Samuel L Jackson's US marine, who - during the rescue operation - orders his men to fire into the crowd. Eighty-three protestors are killed, and Jackson is court-martialled. Despite some qualms, Jackson's old mate Tommy Lee Jones defends him, with help from a star witness - a Vietnamese officer against whom they both fought in the 1960s, but who agrees to speak up for Jackson's professional rectitude. Jackson is acquitted, and Vietnamese and American officers salute each other under the stars and stripes. And just in case anyone in the audience is feeling uncomfortable about that, flashbacks demonstrate that some of the women and children in the crowd of protesters were hiding Kalashnikovs under their robes. Principal among these is a little amputee (Jihane Kortobi), who is revealed as a gun-happy child soldier.

Nevertheless, US critics certainly felt discomforted by Friedkin's movie. "The continuing scandal of Hollywood's Arab-bashing smells to high heaven, but this film manages to stun nonetheless," wrote Godfrey Cheshire in the New York Press. "...an angry Arab mob is for the umpteenth time serving as convenient and clichéd villains hostile to our way of life," sighed Kenneth Turan in the LA Times. On CNN, Paul Clinton judged that "At its worst, it's blatantly racist, using Arabs as cartoon-cutout bad guys, and unrealistic in its depiction of a conflict in the Middle East." Time magazine concluded that "It has something to offend every political sensibility but little to offer in thoughtful drama", and Bruce Kirkland of the Toronto Sun muttered that "Friedkin risks accusations of racism".

Friedkin is well prepared for sceptical responses. I begin by asking if he intended me to feel outraged by the movie. "Only if you are. I can't determine what an audience's reaction will be. And believe me, it varies. I've seen audiences stand and applaud the film throughout the States." But, I suggest, he must be pushing the audience in a certain direction. "Not at all. I don't make a judgement about the characters, in this film or any film that I've made. In fact I work very hard to achieve a lack of judgement."

On the veracity of his presentation of Yemen, he's sticking to his guns. Throughout the interview, he insists on declaiming unflattering reports of the country from sources such as Jane's Intelligence Review and The Economist. "'A harsh land of tribes with a warrior tradition' ... 'free weapons for every citizen' ... 'harbouring terrorists has become a cottage industry in Yemen'. Did you hear what I just quoted? ... I know you don't want to hear this!"

We turn to the subject of his gun-toting little girl. "Do you have any doubt that Yemeni children are armed?" he asks. " Do you have any doubt? Let me show you." He pulls out a fat file of dog-eared cuttings. "Here's the current issue of the National Geographic. And here's a long piece on Yemen. How old would you say this boy is?"

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Me: Probably about the same age as the girl in your film.

Friedkin: And what is he holding in his lap?

Me: I can see he is holding a rifle.

Friedkin: Do you suppose he uses that to pick his fingernails?"

Another flourish of papers. "This is a letter that was sent to American families in Yemen by the Osama Bin Laden Army of Suicidals, ordering Britons and Americans to pack up and get the hell out of Yemen. And then there are all of these articles from the British press that I used as research. Here's The Sun two years ago, referring to Yemen as a Hell on Earth with 120 kidnappings in two years and three Kalashnikovs for each man. None of this stuff is made up, yet it is a fiction film. Not a documentary."

All of which would be fair comment, if it were not that Friedkin's film is blankly incurious about its Middle-Eastern setting, and depressingly unwilling to give its Arab characters motivation any more complex than murderous anti-Americanism - or individual identities, even. "They are viewed as the marine colonel views them," he says. "I'm not here to do a documentary on the people of Yemen."

The film, however, concludes with a series of captions, elucidating the fates of the characters after the story has concluded, and giving the strong impression that the movie is based on events that actually occurred. "Well, you know, this is done all the time in films which are not necessarily documentary," breezes Friedkin, not naming any examples. "Those end-titles are there to give this fictional story closure, primarily for an American audience that demands closure; that does not want any ambiguity about what subsequently occurred. In America today, an audience is not willing to put your film together for you. You better give them some idea about what you have to say about this material." I'm wondering how this is compatible with his earlier remarks about not judging the characters, when he says something genuinely baffling. "My response to what happened [in the film] is totally ironic. And it's possible that the irony could be missed."

So it's a satire, then? It's a film that illustrates how ready American audiences are to cheer the annihilation of villainous Arabs? I try to explain this point with reference to Starship Troopers, Paul Verhoeven's sci-fi satire, a film which cruelly tricks its audience into rooting for a quasi-Nazi army of soldiers as they destroy a race of insectoid aliens. Verhoeven - who lost family members in the Holocaust - made a grim point about propaganda and credulity, but also crafted a movie that functioned perfectly well as a gung-ho actioner about shooting up the bug-eyed monsters. Rules of Engagement, I attempt to suggest, pursues a similar path. But Friedkin's not having any of that.

"I hope you won't distort this, because you leave me with great doubt when you talk about this film in relation to something like Starship Troopers. Why don't you compare it to Paths of Glory instead? I will accept comparison to Paths of Glory, but though I've never seen Starship Troopers I sense that it's a load of bollocks!"

Would he faint with surprise if there were demonstrations outside cinemas showing this film? "If people like yourself and others attempt to stir the pot, I wouldn't be surprised. It's easy to get people riled up, and to get people to see themselves as victims. I urge you to use extreme caution in writing stuff that is liable to make people go out and do themselves and others harm. Because this film should not provoke that."

He's going to the Yemen in September, at the invitation of Abdulwahab Al-Hajjri, that country's ambassador to the United States. At a recent meeting, Friedkin apologised to Al-Hajjri for any discomfort the film might have caused. "He accepted that and understood. He's not happy that the film is in Yemen, but I tried to explain to him that had I set it in an embassy in London or New York, for some reason I don't think that the entire nation would feel that the shoe fitted."

Hussein Ibish believes that the experience of films such as Rules of Engagement has taught Hollywood studios that they can get away with negative stereotyping and suffer few consequences. "But it's especially depressing for a director like William Friedkin to be involved with such a film, if you're like me and think The French Connection is a film with the best chase sequence ever made, and The Exorcist is an absolute masterpiece. I'm disappointed with Friedkin - like everybody else is, I suspect - because he's a truly talented man with some really great films under his belt whose recent films have been awful."

And this, perhaps, is the great tragedy of Rules of Engagement. It's the work of a man who was once a liberal intellectual film-maker, who is now reduced to working with the kind of material Steven Seagal might thumb his nose at. The Exorcist and The French Connection sparkle with embarrassing brilliance at the top of a career which now appears to have gone into freefall. Before Rules of Engagement, his recent work has been principally for television: episodes of Tales from the Crypt, TV movies nobody has ever heard of: C.A.T. Squad (1986), and a sequel, C.A.T. Squad - Python Wolf.

The day after my encounter with Friedkin, I'm talking to Ellen Burstyn - the lead actress of The Exorcist - and ask for her take on the director who gave her her first big lead. "I think he's brilliant. He was a great director when I worked with him. [But] he's very manipulative. When I was injured on the set of The Exorcist, during a stunt, Billy moved the camera in to photograph my screaming. I have a back injury that is with me for all of my life. And arthritis from the scar tissue. I hope I will continue walking for the rest of my life. Monet said that whatever isn't on the canvas doesn't matter. You can take that to an extreme." I ask her if she'd ever work with Friedkin again. But she just laughs.

'Rules of Engagement' (15) is released on 11 August