When I first deposited Journalist Hellershanks in Second Life, I wanted him to stand out. I gave him a shock of bright- orange hair, and a crisp white shirt, and I adjusted his height to about six-foot-four. He looked pretty good, I thought; but he was still missing something. And so, one morning earlier this month, I sent Hellershanks off to buy a penis.

This is not the sort of thing you can do in most computer games; but then, this isn't a computer game, not really, but more a kind of vast virtual imaginarium. In Second Life, you can do just about anything you like; creating a character and making as many adaptations to this "avatar" and its environment as you can design – or as many as you are willing to pay other more technically gifted residents to provide you with.

It's up to you what you do with that freedom, and how many Linden dollars – which can be exchanged for sterling with your trusty real-world credit card – you spend on it. Some people just socialise in the coffee-shops and dance in the discos run by the world's entrepreneurs; others buy swords and shields and head off to battle dragons, or even transform themselves into dragons to battle knights in shining armour. That's not why Journalist Hellershanks was there, though. Like many of the world's residents – about 48 per cent of the 1.3 million active users, according to one survey – he was there to have sex. And in order to do that, he was going to have to go shopping.

If the idea of buying your genitalia over the counter still sounds a little far-fetched, you have some catching up to do. These days, online sex – or, to put it another way, computer-assisted masturbation – is a seriously complicated business. Shopping for genitalia is very far from the most unusual activity going on here. Once you're kitted up, should finding another humanoid and going at it via instant messages and on-screen graphics of your characters making the beast with two backs seem a little vanilla, you can try it with a vampire, or a giant rabbit, or just about any animal, vegetable, mineral or fantasy being you can think of, possibly including an actual beast with two backs.

You may even find desires you never knew you had. Consider Baja Jamberoo, a 21-year-old Scot who went into the world as a closeted gay man in search of some release, and now belongs to the community of furries, players who identify with animals. When I met him, Jamberoo was exuberantly styling himself as an endlessly horny meerkat in a wetsuit. On the wall of his rented virtual house, he had hung a picture of Bugs Bunny with his backside jutted provocatively in the air. He frequently finds himself in scrapes with tigers, whose barbed penises cause him no end of imaginary agony – and delight. ("Mine is canine," he says: "I wouldn't know what a meerkat penis looks like.") Now he keeps an eye-popping and exhaustive list of his preferred activities online. Favourites: Tentacles. Yes: Knotting. Absolutely no: Heavy ballooning. "I should say," he adds, "that I have no urge to jump a fox if I see one in the woods."

"You can do things online today that you could hardly imagine in real life," says Brenda Brathwaite, a games designer and historian of sex in games. "Are there really voraphiles, people who like being eaten, in the real world? But online you could be a hammer and have sex with a desk if you wanted. If you can build it or animate it, you can do it."

For those of us whose sexual experiences have so far been limited to the realms of the possible, this is mind-boggling stuff; but Second Life, at the moment the dominant virtual world for cybersex (up to 15 million people have logged on at some time since its creation in 2003), may not be cutting-edge for very long. Soon, some experts say, a technology called teledildonics will make it even easier to forget that you're sitting alone in your bedroom with your trousers round your ankles, by hooking up the person at the other end of the broadband connection to physical stimuli that will mean users can finally return to two-handed typing. According to Corey Silverberg, a sex educator and online sex columnist, "The technology still hasn't been fully realised, and some of it's still a hobbyist thing. But the potential in this is just phenomenal."

In the meantime, though, Journalist Hellershanks was still without a penis, and so I clicked the location of a nearby sex shop and sent him teleporting on his way. The shop in question was StrokerzToyz, a vast, gleaming digital emporium that could satisfy even the most lascivious Second Lifer. I navigated Hellershanks past the SexGen Beds and the automated poseballs, and eventually found the genitalia aisle, where a friendly seven-foot demon called Rawk Lionheart offered his assistance.

The two of us ran through the various options, weighing up the pros and cons of each. Lionheart generously donated a couple of old phalluses of his own that he no longer had a use for; but, for his money, the smart Second-Lifer couldn't go wrong with the BV-3D, for just 1,000 Linden dollars (L$) – about £2.70 at current exchange rates – the best-value genitalia in all of gamespace.

"It's a StrokerzToyz model so you know it's good. It will do you better than that stick I gave you," said Lionheart. "LOL!" (Laugh out loud).

"LOL!" Hellershanks happily replied, and handed over his virtual cash.

"As an entry level attachment, the BV-3D is one of the easiest to operate," store owner Stroker Serpentine told me approvingly when I later consulted him about my purchase, although he also noted that the L$2,500 Paragon was the only choice for the real aficionado.

Serpentine, whose real-world alter ego is Kevin Alderman, is arguably Second Life's most prominent cybersex mogul. He has been earning a living this way for a while now, and sold the most popular adult destination in Second Life, Amsterdam, for $50,000 last year – 50,000 real dollars, not the Linden kind.

But now he and his fellow cybersex merchants are looking for the next big thing. The problem with the market as it stands is that worlds such as Second Life are simply too complex and absurd-seeming for the beginner to easily navigate, and that stops businesses such as Alderman's getting into the big time. How many people, for instance, are willing to tolerate the system crashes that will inevitably interfere with the occasional romantic tryst? "Until the technology is seamless and straightforward," says Damon Brown, author of the videogame sex history Porn and Pong, "the general public is going to have a problem with it. In the meantime, it's only going to be nerds who understand the intricacies who are going to be open to using technology to connect in the bedroom."

To conquer that barrier, Alderman is working on an alternative online world. Called Eros-3D, it will be devoted exclusively to sexual interactions. All of the content will be designed by professionals to be as user-friendly as possible, as opposed to the frequently haphazard homemade animations and outfits that fill Second Life.

But Alderman also has more revolutionary ambitions. The most eyebrow-raising is the prototype of a motion-capture suit that would allow seriously committed cybersexers to send movement instructions to their in-game character by corresponding movements of their own. The theory is that this will lessen the gap between real and virtual experiences. In reality, though, it emphasises precisely the possibility that most cybersex lovers are at pains to forget: that the whole business might – just might – occasionally shade into the ridiculous.

To judge from videos of prototype suits in action, there can be almost no one alive who would not feel too silly to function while wearing one. "Right now they're a little cumbersome," Alderman concedes – but, he adds hopefully, "the manufacturers are constantly miniaturising the technology." Even so, at a cost of thousands of dollars, it seems unlikely to get a foothold in the market for quite some time.

In the earliest days of home-computing, such technological wizardry would have sounded like science-fiction. In 1982, the most sophisticated interactive titillation available was a rudimentary and deeply offensive title called Custer's Revenge, where the player took the role of a lascivious General Custer at the battle of Little Bighorn and moved him across the screen through a hail of arrows in order to rape a captured Native American by repeatedly pressing the ' right cursor key. (The influence of Custer's Revenge was cited by a concerned media as a contributing factor in at least one real-life sexual assault.)

After that inauspicious beginning, it wasn't long until users' lusty ingenuity found a way to wring a more sophisticated sexual experience from games than it had occurred to programmers to try to provide.

Multi-User Dungeons, or MUDs, were strictly textual worlds designed for adventuring elves and orcs to find treasure and slay dragons; but in Shades, the first such game to offer private online spaces away from the prying eyes of any dungeon master, otherwise upstanding members of the questing community were frequently found indulging in heavy petting of dubious value to their quest.

Kevin Alderman, for his part, was drawn to cybersex almost from his first days hanging out online – in those days, on an amateur basis. In the late 1980s and early 1990s, there were plenty of virtual communities that followed on from Shades and offered the possibility of sex. But the one that really hooked Alderman was SeduCity, a two-dimensional graphical interface that lent a new hint of verisimilitude to the previously textual environments. "There were other worlds that had components of virtual sex," Alderman says, "but this was the first to have it as the primary focus. And it offered the chance for user-generated content. And that was it. I was hooked."

In 2003, when Second Life emerged with its cutting-edge three-dimensional interface, Alderman and his friends wasted no time in porting their fantasies across. But there were no beds to have sex on, and so Alderman – now with his chosen nom de sexe, and sporting, in sharp contrast to his ordinarily puffy first-life self, a chiselled jaw, stacked upper body, and mane of jet black hair – built one. And then there was no sex to have on the new beds, and so Stroker Serpentine built that too, making his first doggy-style animation from a bastardised version of a pose designed for use while riding a motorbike.

The rest is pixellated history. Besides his in-game wives, Alderman-Serpentine has had thousands, possibly tens of thousands, of online sex partners: "enough to make Gene Simmons blush," he says, before sheepishly adding that "a lot of it is research". He also has a real-world wife, but says that it's perfectly possible to maintain separation between the two halves of his existence. "Nothing will ever replace the tactile sensation of warm flesh," he insists. "This is just another form of expression as a creative being."

Not everyone is able to draw such sharp distinctions between their first and second lives. Only last week, newspapers reported the sad story of David Pollard and Amy Taylor, whose real-world marriage was added to the list of those to be broken up by a Second Life affair. According to the counselling service Relate, an increasing number of relationships are coming under strain because of virtual trysts.

It's hardly an epidemic, and Pollard and Taylor's circumstances are complicated by the fact that the catalyst for their love had been their shared interest in the game; still, their marital breakdown, and differing views of exactly what constitutes an affair, emphasise just what complex moral territory this is. "We tie sex so much to the body," says Corey Silverberg. "We say that real sex is what happens when skin touches skin. But the fact is that so much of it is really in our minds. And so inevitably these spaces offer incredibly intense, real sexual experiences."

If sex and betrayal can really be so vividly experienced without any kind of physical interaction, the prospect of teledildonics must have relationship counsellors anticipating queues around the block. By allowing remote users to control a sex aid plugged into a broadband connection, teledildonics, says Silverberg, "could bring the prospect of really feeling as if you are reaching out to touch someone."

Besides any potential scares for spouses of errant second-lifers, there are tremendous potential benefits for couples forced apart by work: one company producing an early teledildonics model, the Sinulator, claimed heavy sales to members of the armed forces, although enterprising webcam strippers, always on the lookout for ways to increase the interactivity of the service they offer, also seem to have got a good sense of the device's potential. If one imagines the Sinulator combined with other emerging technologies, such as the system that detects movement in a video to reproduce sensation in the appropriate spot – so that a caress on the thigh by someone at the other end of a webcam could be felt in the same place – and even the clunky old motion-capture suit, it becomes possible to imagine – albeit about 30 years in the future – a world in which it's possible to construct a reasonably convincing artificial-reality version of sex.

This might seem a slightly depressing prospect: there are plenty of teenage boys, it could be argued, whose social development could be stunted for good by the knowledge that sex could be on-tap without so much as a whiff of human. To this fear, seasoned sex and technology blogger Regina Lynn issues a peremptory response. "[The idea] that we'd no longer need other humans because we'd have these machines is ridiculous," she wrote in an email. "I say, that person probably wouldn't be in a healthy sexual relationship with another human anyway, and isn't it nice to provide an option that a) gives them a more interesting sex life than they'd have without the sex-tech and b) keeps them out of the gene pool?"

With no such prospect on the cards any time soon, I sent Journalist Hellershanks out to the nightclubs in search of someone to pop his cyber cherry the (relatively) old-fashioned way. After a series of misadventures as a result of neglecting to remove his brand-new attachable phallus after trying it on over his jeans in the shop, Hellershanks finally plugged into a dance animation ball next to a perky looking cheerleader called Xephilia. Xephilia sported cat ears, a tail, and the inevitable vast breasts that suggest a high proportion of Second Life women are not all they claim to be. She purred, and Hellershanks spotted an opportunity. "Hi!" he said. "I'm new here and looking for some FUN."

"I can see that," Xephilia replied. "Look at your dick. LOL!"

"LOL!" replied Hellershanks, thinking on his feet, and within a relatively conservative 30 or 40 seconds, the pair left the club. They teleported to a staggeringly ornate private room that Xephilia had rented for the purpose and, after a brief pause to wait for Xephilia's hair to materialise, the new lovers got down to it.

Their congress did not pass off without mishap. On two occasions, their positions were inverted, leading to some mildly unsettling scenes of my bemused- (or possibly aroused-) looking alter ego on the receiving end of an invisible phallus; at another point, the BV-3D mysteriously fell off, and proceedings had to adjourn while it was found.

Still, they got through it unscathed. And now Hellershanks has hung up his prosthetic member for good.

It would, it must be admitted, be unfair to draw any hard conclusions about the potential erotic content of such an encounter from the fact that this one had all the sexual fizz of a middling episode of Last of the Summer Wine. After all, the thrill of any such experience absolutely relies on a mutual investment in its reality – and, even today, just as much on the words that you provide as on the moving pictures that they accompany. And on that front, I concede, my efforts to take careful notes on proceedings may have left poor Hellershanks without a chance of any real excitement.

The heartening irony, then, is this: for now, at least, even the most hi-tech virtual worlds are finally defined by the relationships that they foster. "Cybersex requires constant, quality communication," Regina Lynn says. "You have to take responsibility for your own pleasure as well as create a story in harmony with your online partner." So what if that happens to be a story about a meerkat and a tiger falling for each other in a computerised bar? In the end, as Lynn puts it: "It's not about the tech. It's about the connection."