In the gossip column of 20th-century theatre, John Arden has gone down as the man who actually picketed one of his own premieres in protest at the political emasculation of his play by the RSC. That unbiddable, mettlesome spirit is evident in his masterpiece, Serjeant Musgrave's Dance, revived in Sean Holmes's compelling and beautifully lucid production for Oxford Stage Company. Remounted at a time when Britain has once again become an occupying power, with troops in Iraq, this 1959 anti-imperialist play has clearly lost none of its salutary sting.

The piece follows the fortunes of four Army redcoats who have deserted from service in some distant Victorian colony. They make their way to a bleak, strike-bound English colliery town and are billeted in the alehouse. Posing as recruiters, they are suspected of being strike-breakers by both the mayor and the miners. In fact, they are genuinely on a recruitment drive - though of an eerily inverted sort.

Disgusted at how the murder of one soldier on foreign service led to the tit-for-tat killing of five natives, the eponymous sergeant has hatched a plot to round up and execute 25 townsfolk from the dead man's birthplace. In the most literal way possible, this mad mathematical revenge will bring home to the civilians the bloody, human cost of colonialism.

With the redcoat uniforms picked out in all their scarlet effrontery against the misty pale blue of Anthony Lamble's lovely, spare design, Holmes's production unfolds in a manner alert to every aspect of the play's bracing ambivalence. It's not until the shocking moment when Musgrave hoists the corpse of his murdered comrade instead of the flag in the town square that we can be sure of his purpose. Before that, the revelations are indirect and piecemeal, and it's possible to sympathise with the sergeant, whom Edward Peel plays arrestingly as a granitic, Bible-reading giant of a man rather than as a loony-in-waiting.

Arden has written that the story is "partly one of wish-fulfilment", tapping into the common fantasy of wanting to match outrageous violence "with an even greater and more outrageous violence". Serjeant Musgrave calls that desire into play, but it does not indulge it. What gives the play its rich ambiguity is the way it puts its anti-colonial message into the mouth of a man who proves to be a religious, Old Testament maniac. As one of the soldiers says to him, he has tried to end war by its own methods: "You can't cure the pox by further whoring." So one of its great images - the Gatling gun trained directly on the audience - is no simplistic agitprop gesture, but a spectacle with a multiplicity of meanings.

The production is superbly cast - with Billy Carter magnetic in his compulsive Irish clowning as the soldier who tries to desert from desertion (and whose death over-engineers the ending), and the luminous Maxine Peake unnervingly direct here as the young widowed barmaid who has had to turn to prosititution. This character often lapses into ballads, and the play itself has the haunting, wiry simplicity of a well-sung ballad.

In his engagingly dissident book The Full Room, the Oxford Stage Company's artistic director, Dominic Dromgoole, fulminates eloquently about the neglect of Arden, asking what kind of world can have pushed him aside to make way for the latest bit of urban chic. "The world we live in, sadly." It would be good to think that this excellent revival could provoke a widespread re-evaluation.

Northcott Theatre, Exeter (01392 493493) to Saturday, then touring to 22 November; see www.oxfordstage.co.uk for details