Drawing back the 18th-century crimson curtains at Handel's bedroom window, you rather expect to see a horse and carriage dropping a gentleman back from his club or a tradesman delivering a brace of pheasant. The reality is a perfectly groomed assistant folding knitwear in the window of Joseph and Christmas shoppers gazing at the weird green plastic implements on sale in Alessi.

When the composer took a house in Brook Street, it was at the heart of one of London's most genteel districts. His neighbours were a colonel in the Guards and an MP who became the first Viscount Galway.

Now it is one of the smartest shopping streets in Mayfair, filled with boutiques and galleries that pay handsome rents for their square feet of space.

Handel moved into No 25, one of four adjoining new houses, in the summer of 1723. Although he never bought the property, choosing to lease it annually, it remained his home until he died, 36 years later.

His time there was extraordinarily productive. In the drawing room, on the first floor, he wrote Messiah, operas from Giulio Cesare to Tamerlano, Music For The Royal Fireworks and his coronation anthem Zadok The Priest. It's impossible to disagree with Jacqueline Riding, director of the Handel House Museum, when she says that "this is one of the most important addresses in Western music".

For most of the last century, a plaque on the wall was the only evidence of 25 Brook Street's illustrious history. The rapidly rising value of the area made the use of the house for anything other than commercial purposes an apparently impossible prospect. In 1905, one owner ripped down the original facade, announcing that "West End property is far too valuable to be left to rot just because some genius of the past age once happened to live there".

In 1959, the musicologist Stanley Sadie went to a party at the house to mark the bicentenary of Handel's death. Then owned by the textile firm Viyella, it was a shadow of its former self, most of the original effects having been ripped out by previous tenants. Sadie decided that the building should somehow honour its most famous occupant. His dream finally came true last year, when the Handel House Trust signed a lease on the upper floors.

Immediately it was decided that the ravaged interior should be restored to its Georgian glory. The building next door had retained much of its period detail, so the museum's architects were able to take profiles of panelling, cornices, shutters and dados and copy them for No 25. Three early 18th-century marble fire surrounds were located - they had been salvaged from a Covent Garden coffee house where Handel was a customer - floors were patched with second-hand boards and lime-plaster ceilings were reinstated.

Handel remained a bachelor all his life and seemed to have little interest in redecorating his house. Curtains that he had ordered in 1723 were probably the same ones that appear on an inventory compiled after his death. Analysis of the walls indicates that he never repainted the house, keeping the lead grey colour chosen by the building's developer. Painstakingly, experts have recreated the colour for the restoration.

London was originally to have been a brief stop for Handel. He was well established in Hanover as kapellmeister, or head of music, a job that carried a good salary. He came to Britain to compose for a new opera company and planned to return to the Continent after a year or two. Soon, however, he was writing church music and oratorios, performing for Queen Anne and, later, the first Hanoverian monarchs, George I and II.

With such grand patronage, Handel quickly became rich, but he continued to live simply. Brook Street was a modest house by Georgian standards, with only half a dozen principal rooms and accommodation for a maximum of three servants.

"I think he was very conscious of the potential of one day being without money," says Riding. "He was a great entrepreneur, but hated having to rely on patrons and wanted to be independent. He actually lived quite frugally."

One of his few indulgences was buying works of art. Every inch of wall space was covered with paintings, including two Rembrandts. Now British institutions including the Tate, the Victoria and Albert Museum and the National Portrait Gallery have lent pictures of Handel and his contemporaries to the museum.

There are portraits of John Gay and Alexander Pope, and a picture of Handel on loan from Queen Elizabeth hangs over his bedroom mantelpiece. In his dressing room there's a portrait of Handel's friend Thomas Britton, a Clerkenwell coal merchant who held concerts in the room above his shop, described as the "weekly resort of the old, the young, the gay and the fair of all ranks - including the highest order of nobility".

Apart from buying pictures and occasionally indulging in a case of good Burgundy, Handel gave away much of his money. He sent regular cheques to his widowed mother and his sisters in Germany, and he was a generous benefactor of the London Foundling Hospital, established for the city's orphans in 1739. In the 1750s, he would conduct an annual performance of Messiah in its chapel, and the event not only raised money, but also cemented his position within the Georgian social establishment.

His only substantial time away from Brook Street was his nine-month sojourn in Dublin, in 1742, for the premiere of Messiah. Though a huge success in Ireland, it was not immediately popular in Britain - it took the Foundling Hospital performances to establish it as his most popular oratorio.

Brook Street was not just a house. It served on occasions as a box office for Handel's entrepreneurial endeavours; from the 1730s onwards, there are extensive references to Handel rehearsing operas and oratorios there. The inventory taken after his death included more than 40 rush-matted chairs, suggesting the house was used as a small-scale venue.

Now, once again, music echoes through Handel's house, with students from London's principal music colleges, including the Royal Academy and the Guildhall, using the first-floor music room as a rehearsal space.

"The students say they get a real sense of what chamber music was composed for," says Riding. "It's a very intimate space where players literally stare into the eyeballs of the audience." Duos, trios and quartets play with the public wandering around them and stopping to listen to "work in progress".

On Thursday evenings, when the museum is open late, the students give a more formal concert.

The regular presence of young talent is proof that the Handel House Museum is far from being a dusty, glass-cased tribute to a dead composer. "So many visitors comment on the warmth of this house," says Riding. "Since the panelling went back up and the textiles have come in, it's really come alive again. Especially when you have the music Handel wrote here gently wafting up from the first floor."

The Handel House Museum is at 25 Brook Street, London W1 (00-44-20-74951685). It is open from 10 a.m. to 6 p.m., Tuesday to Saturday (to 8 p.m. on Thursdays) and from noon to 6 p.m., Sundays and bank holidays