The second world war is such a pivotal event in human history that affected generations have inevitably speculated about what might have happened had the momentum swung slightly another way. Variations on Hitler's defeat by the allies have become a recurrent strain in the genre of counter-factual or alternative-history fiction.

The premise of a German and Japanese triumph has inspired writers from Philip K Dick to Robert Harris, whose Fatherland (1992) consciously offers a German-American parallel to the Nazi-invaded Britain of Len Deighton's SS-GB (1978); in Philip Roth's The Plot Against America (2004), President Roosevelt loses the 1940 US election to the isolationist, pro-fascist Charles Lindbergh. Now comes CJ Sansom's provocative thriller Dominion, depicting a Britain that surrendered to Germany on 9 May 1940  the day before Churchill, in the real world, became PM  and now serves as a satellite state of a triumphant Third Reich.

Although the field sounds crowded, one of the pleasures of these books is the way in which writers have found their own space, often through an autobiographical concern. Roth, extending his depiction of the Jewish experience in America, imagined a US in which antisemitism had become federal policy rather than a dirty social reflex. And Sansom, born in 1952, sets the main action of Dominion in that year, vividly dramatising a Britain foreign to the one remembered from his childhood.

Counter-factual fiction is subject to a phenomenon variously expressed in metaphors involving butterfly wings, loose threads in sweaters and lines of dominoes: pull out one thing and the rest unravels. So, for example, in Dick's The Man in the High Castle, the second world war extends to 1947, while for Deighton it ends in 1941. A single alteration of history  such as, in Sansom's vision, Lord Halifax rather than Churchill holding sway over the war cabinet in 1940  can have repercussions all over the globe.

In this respect, one of the thrills of Dominion is to see a writer whose previous talent has been for the captivating dramatisation of real history (in his five books about the Tudor sleuth, Matthew Shardlake, and the Spanish civil war novel Winter in Madrid) creating an invented mid-20th century Britain that has the intricate detail and delineation of JRR Tolkien's Middle Earth, though thankfully described in better prose.

The big historical sweeps seem credible guesses: the newspaper tycoon Lord Beaverbrook  an isolationist, pro-German equivalent to Roth's President Lindbergh  is prime minister, with the British fascist leader Oswald Mosley as home secretary, while Churchill is the leader of an underground resistance movement that occasionally daubs V signs in public places. In America, Adlai Stevenson has just won the 1952 election. In recorded history, Stevenson was thrashed by D-day hero General Dwight Eisenhower, but, in this version, there hasn't been an allied victory to gild Ike's reputation and so he hasn't even run for the Republicans.

Sansom is equally impressive in the depth of the background colour. Air-raid shelters  never, as it turned out, needed  are items of poignant incongruity. Conversations glancingly reveal that what we know as the London and Helsinki Olympics of 1948 and 1952 took place in quite different countries because of the alterations in the geo-political situation. Leading British authors of the period  EM Forster, JB Priestley, WH Auden  have disappeared ominously from view after criticising our political masters in Berlin. A massive picture of Hitler hangs in the lobby of the National Portrait Gallery.

Our guide through this fiercely seen fantasy Albion is David Fitzgerald, a civil servant who has disguised an aspect of his family history in order to flourish under the regime. David's wife Sarah, haunted by a powerfully evoked bereavement, is happy to keep her head down and ignore political realities until, in a brilliantly written set-piece on a smoggy Tottenham Court Road, an aspect of Auschwitz comes to London.

A complication of second world war counter-history, as Sansom acknowledges in an afterword, is that depictions of a German victory involve fingering historical British figures as Nazi collaborators. Because they are dead, defamation is no legal risk, but there may still be moral jeopardy. Beyond the possible unhappiness of the descendants of Beaverbrook and Enoch Powell at their actions in this book, feminist and Scottish readers respectively may gasp at the suggestion that Marie Stopes is advising the Ministry of Health on eugenic sterilisation and that the Scots Nats have enthusiastically signed up to the Hitler agenda.

But, as in all the best war-related alternative fiction, the finger of suspicion also jabs uncomfortably at the reader. Sansom directly confronts the frequent, smug view in the UK that nazism and the Jewish Holocaust were inherently German perversions. The English, in this version, often prove just as susceptible to strong but psychotic leadership and the prospect of racist genocide. The song from Cabaret that poses the question "What Would You Do?" might be the theme tune to a tremendous novel that shakes historical preconceptions while also sending shivers down the spine.

 Mark Lawson's Enough is Enough: Or the Emergency Government is published by Picador.