Sondheim may have had misgivings about his 1973 musical loosely based on Ingmar Bergman's film Smiles on a Summer Night set in turn-of-the-century Sweden, but audiences immediately embraced it as passionately as its cast of sophisticates embrace each other. Hugh Wheeler's witty book, written in a breathless fortnight, seamlessly complements Sondheim's intricate score, often in waltz time, and his thrillingly unpredictable rhymes.

"Perpetual sunset is rather an unset-tling thing" perhaps sums up the action of this merry-go-round of liaisons, begun, ended and resumed in the warmth of the Scandinavian summer night. Director Paul Foster fashions a chamber musical in the intimate Watermill space, drawing the audience into a maelstrom of sexual passion. Although he casts members of his actor/musician ensemble as the chorus of elegant lovers, the full company join in the waltzes that swirl through the action, making their romantic encounters into a sort of collective madness.

Sarah Travis' unusual sound tapestry is instantly arresting. She has form re-imagining Sondheim with her multi-award winning Sweeney Todd, a Watermill transfer to Broadway. There is a glorious richness of night music here as 13 performers play many more instruments.

Matt Flint's dynamic choreography casts this multiplicity of instruments as extensions of the characters playing them and even as characters in their own right. Gorgeous fluid tableaux melt into each other, illuminating shifting relationships. When performers play in the band as onlookers they add a subtle extra dimension. "You must meet my wife, my Anne" sings Alastair Brookshaw's Frederik in his rich tenor to his old flame Desiree, underscored by Lucy Keirl's ingenuous Anne herself, trilling quizzically on flute.

Josefina Gabrielle's stunning Desiree is instantly magnetic from her ‘star' entrance. From the self-deprecating irony sending up "The Glamorous Life" of the touring actor, to the emotional desolation of her "Send in the Clowns", she is warm, open and irresistible.

The shifting relationships are observed by her teenage daughter, Tilly-Mae Millbrook's wide-eyed, wise child Fredrika, often at a second piano above the action on David Woodhead's set of golden wood. His design morphs subtly from garden to bedroom to provincial stage and, lit by Howard Hudson, from balmy early evening to the brief twilight of the northern summer night.

Fredrika's closest relationship, with her maternal grandmother Madame Armfeldt, erstwhile mistress to kings, is extraordinarily touching. Dillie Keane's Madame delights with her perfectly-timed dry asides, concealing the regret of old age looking back on transient relationships.

Everyone in this strongly-cast production deserves an accolade. Christine Tedders' account of Anne's sexually voracious maid Petra is especially arresting; her plotline developed in a couple of lines, her ironic take on love and marriage shared in one of Sondheim's finest numbers "The Miller's Son". Here it is re-imagined with darkly beautiful underscoring on double bass by Alex Evans as Frid the valet, fresh from their fling. It sums up perfectly the intelligence of this stunning realisation of a work that is at once elegiac, knowing and sexy.

A Little Night Music runs at the Watermill, Newbury until 16 September.