Don Quixote (Swan, Stratford-upon-Avon)

The poet, war correspondent and former Sunday Times drama critic James Fenton has a place in RSC history for having written the first lyrics for Les Miserables; they were never sung, but the deal he signed has earned him 0.5% of worldwide box office receipts ever since.

So it's pleasing to see Fenton renew his RSC association on work that they are actually performing. HIs well-received Chinese play, The Orphan of Zhao (2012), is now followed by this gorgeous and lyrical adaptation of Don Quixote, not seen on the British stage since Keith Dewhurst's script at the National in 1982 starring a sensationally melancholic Paul Scofield as the fantastic nostalgist of knight errantry.

Angus Jackson's production is also a reminder that Cervantes, like Shakespeare, died 400 years ago: it's quarter-centenary a-go-go by the Avon this spring… and he and Fenton have brilliantly energised a novel – tough call – that is essentially a comic epic with no plot and too much philosophising.

The partnership of David Threlfall and Rufus Hound as the decrepit, myopic Don and his roly-poly sidekick, Sancho Panza (take a bow, fat-suit lady of the wardrobe), is ingeniously contained first within the tug of Panza's domestic roots and screaming infants; and then within the Don's bedroom demise.

This gives the show a satisfying shape and also, in the last hour (of three), a curious surreal boost as the blindfolded duo take off into sci-fi space on an iron horse, Panza comes a cropper as governor of his imaginary island – he falls, hilariously, down a hole dug for the grave of the Don's spurious and very undead aristocratic lover – and fame outstrips truthful reality.

The evening is one of the most seriously enjoyable at the RSC in a very long time, with some wheezily Hispanic songs (music by Grant Olding), a pair of knackered, improvised wooden horses mobilised by different cast members in each scene (puppetry by co-director Toby Olie of War Horse renown), and a miraculous manifestation of windmills (design by Robert Innes Hopkins) that hoist the hapless hidalgo in the air as he foolishly tilts at them.

The Don has read so many books about knight errantry that he sees the phantasm of Dulcinea's beauty in a greasy wench, glory in galley slaves, the dust clouds of advancing armies in a flock of woolly sheep and a gleaming heroic helmet (his own) in a barber's tin basin.

Threlfall's spindle-shanked, croakily vocalised hero is a masterful study in delusion and delirium, while the irrepressible Hound jostles with the audience as much as he does with Threlfall, at one point filling his fardel by catching his comestibles in a sack as they are thrown from the full height of the Swan.

Jackson's splendidly animated ensemble – including Gemma Goggin as Panza's fearsome wife, Timothy Speyer as the barber, Natey Jones as a pouting equine and Richard Leeming as a chinless wonder – fill in a rich tapestry of revellers, actors, shepherds, monks and acrobats, all part of the Don's dream and the production's joyousness.

Don Quixote runs at the Swan Theatre, Stratford-upon-Avon until 21 May 2015.