Daring and provocative, bracingly challenging, Ian McDiarmid's retelling of Goethe's take on the Faust legend is a short sharp evening of contrasts. His 72 year-old Faust aches as much for youth as he does for knowledge. McDiarmid has pared down Goethe's busy storyline and huge dramatis personae to these twin goals for which he'll trade heaven for hell, sharing the stage with only two fresh young performers. All three offer wonderfully rounded performances

Sure-footed young director Lisa Blair confidently leads a production team as achingly cool and youthful as the smooth-operating, hoodie-clad demon Mephisto Faust conjures up (Jacques Miche). Georgia Lowe's deceptively simple box design is actually a box of tricks, on which video designer Zsolt Balogh projects a suggestion of over-sized shelves of books green with mould, morphing into vivid purples and yellows once Daisy Fairclough's disturbingly adolescent Gretchen reawakens Faust's sexual desire.

All this is underscored by composer and sound designer Richard Hammarton's thrilling soundtrack, ravishing with the unearthly purity of Gretchen's song, fizzling and crackling in concert with lighting designer Elliot Griggs' slashes of lightning.

Religion is an ever-present force. The pure Gretchen is an ardent believer, sullied by Faust's attentions. The words of the Bible dominating Faust's library to book-end the action are the opening of St John's Gospel – 'In the beginning was the Word,' but eventually Faust's actions alter them too, Deed replacing Word.

Meanwhile, as Mephisto serves Faust, the 'black magic' of the computer-game pyrotechnics serve the words, for McDiarmid's spare muscular verse adaptation of Philip Wayne's translation drives the narrative.

A dapper waist-coat-clad academic, Faust first lectures and then confides in the audience in the Watermill's intimate space, his thirst for knowledge, action – and youth. And so, jabbing a syringe into his groin, he summons Miche's insinuating Mephisto to help him and promises to serve him eternally once he's achieved his heart's desire. Mephisto's unsettling solution is a body swap. "Stride out into the world through me" he suggests. And so Gretchen is wooed and won – by Faust's voice in Mephisto's honed young body, fit in Faust's sharp suit, while Faust's corporeal form lurks longingly in the shadows. McDiarmid hunches in Mephisto's hoodie, only his eyes visible, creepily suggesting a paedophile. It's an extraordinarily potent image, brilliantly realised.

The vision of deflowered Gretchen, the white garment of the penitent drenched in water mixed with blood clinging to her, a cross around her neck as she embraces her fate, is as ambiguous as it is shockingly beautiful. Is Faust engulfed by the red pit of flames below? The final blinding image is of a cross between the words 'Jesus Saves'. This devilishly enticing retelling of Faust's story leaves room for doubt.

Faust X2 runs at The Watermill until 25 March.