The following apology was printed in the Observer's For the record column, Sunday 14 February 2010

"... the importance of this excellent and balanced study cannot be underestimated". We meant overestimated.

For 200 years, from the mid-15th century, the Ottoman Empire was the most powerful force in all Eurasia and Constantinople was the Mediterranean's greatest port. The sultan and his viziers ruled a great patchwork of peoples, languages and religions, an empire comparable in size and importance to that of Rome. Decisions made in Ottoman Constantinople affected millions across the globe, from Ireland through Poland to Sumatra. There was no other city in Europe that in size or grandeur could begin to compare.

By contrast, 16th- and 17th-century England was a small and relatively impoverished mono-religious and mono-lingual state, perched precariously on the cold northern edge of Christendom. Compared with the might of the Ottomans, it was neither a major political nor military power. Although Britain's navy was sufficient to defend it from its immediate neighbours, Ottoman technological superiority at sea led to the capture of large numbers of British vessels and by the 1620s the Turkish navy had extended its reach into the waters of the British Isles.

Yet despite this, much of the contact between Britain and the Ottoman empire was both peaceable and profitable. After the founding of the English Levant Company in 1581, through a charter of Queen Elizabeth I, Britain was closely engaged with the Turks as the Ottoman empire expanded westwards through central Europe and Britain's trade network expanded eastwards to meet it. The company sold wool and tin (to be used in Ottoman armaments and munitions production) and in return bought huge quantities of Ottoman silks, Indian spices and indigo and, oddly enough, currants.

There was, in consequence, a great deal of movement between the two worlds. Elizabethan London had a burgeoning Muslim community that encompassed a large party of Turkish ex-prisoners, some Moorish craftsmen, a number of wealthy Turkish merchants and a "Moorish solicitor". At the same time, large numbers of Englishmen  from traders and diplomats to renegades and galley slaves  lived in Ottoman lands. When Charles II sent Captain Hamilton to ransom some Englishmen who had been enslaved on the Barbary Coast, they refused to return: the men had converted to Islam and were now "partaking of the prosperous Successe of the Turks... they are tempted to forsake their God for the love of Turkish women," wrote Hamilton. "Such ladies are," he added, "generally very beautiful."

James Mather's wonderful book is the first full-length study since 1935 of the Levant Company, the organisation that oversaw both England's trade and diplomacy with the Ottoman world, and which supervised and set the tone for the odd yet remarkably successful relationship between the two. As Mather shows, by the end of the 17th century trade with Turkey accounted for one quarter of all England's overseas commercial activity. It was the first non-Christian ­environment in which Englishmen established a major and distinct national presence and was an important and largely forgotten precursor to the centuries of empire ahead.

Yet as Mather is at pains to emphasise, there was an important distinction between these early contacts and the later colonial relationships that grew out of them. The attitude of the Jacobean travellers was utterly different from the arrogance of their Victorian successors. In the Ottoman Middle East, it was they and not their alien associates who had to conform; indeed, at this period, most Turks had never heard of England and as one imprisoned Englishmen put it, in Ottoman Jerusalem "the Turks flatly denied... they had ever heard of either of [his] Queen or country".

Mather excels at portraying the ­everyday life of the Englishmen who joined the Levant Company. He traces their recruitment, apprenticeship and training and the adventure of their maiden voyage out: "The Seae beating sometimes into my very Cabin; & I tossd & tumbled sometime my bed upon mee, & sometimes I upon my bed... all wet & dabbled, & in a confusion of Torments." Another factor compared life on ship to "imprisonment... with a chance of drowning besides".

Many seem to have lived like modern expats, keeping to their own compounds, importing their own cider, butter, beer and bacon, playing "bowles" and "krickett", indulging in amateur dramatics and drinking too much. The Aleppo factors even imported their own pack of English hounds. Others mixed in, recording the detail of Ottoman life in a series of fascinating dispatches, though few Englishmen seem to have had as much intimacy with Ottoman life as Francesco Lupazzoli, the priapic Venetian consul in Smyrna, who lived until he was 114, fathering no less than 126 children, 105 of them illegitimate, from his five wives and innumerable Smyrniot mistresses. The English factors, in contrast, had to vow to avoid all indulgence in "fornication and matrimony" as well as "cards, dice, tables, taverns and playhouses".

It is a fascinating and little studied subject and Mather's work is a major contribution to the historiography of Britain's relationship both with the Mediterranean and the world of Islam, which at that point was much more tolerant than religiously repressive Reformation Europe. It is also a vital corrective to the influential but wrong-headed readings of the flagbearers of intellectual Islamophobia such as VS Naipaul and Bernard Lewis, both of whom have manufactured entirely negative images of one of the most varied empires of history and the complicated European relationship with the Ottoman world.

One of the most interesting questions Mather raises is why the Levant Company never went the way of its younger contemporary, the East India Company, and turned into an empire-building, land-seizing, imperial-military power. After all, in the early years, the two companies overlapped to a considerable extent in terms of both investors and personnel: in the 1630s, 28 of the 47 directors of the East India Company court were also Levant Company members. It was not, he believes, for lack of opportunity so much as because of the conservative way in which the Levant Company was managed. It always erred on the side of caution and tried to avoid the devastating expenses incurred by its India counterpart in the course of its military adventures.

Ironically, though, it was the East India Company that eventually helped bring down the company that had inspired its birth. After the Napoleonic invasion of Egypt, the East India Company moved into the country and the Levant Company sank into financial impotence. Yet at its height in the 1630s, it was "the most flourishing and beneficial company to the commonwealth of any in England" and the agent through which Britain engaged with and interacted with the Islamic world. Given this, the importance of this excellent and balanced study cannot be underestimated.

William Dalrymple's most recent book is Nine Lives: In Search of the Sacred in Modern India (Bloomsbury)

To early English visitors, the grandeur of Constantinople's setting alone, on the border of Europe and Asia, made the city seem "built to command all the world". They marvelled at a skyline of cascading domes and pencil minarets, the fearsomely fortified city walls, and the majestic Topkapi Palace, home of the Ottoman sultan, one of the most powerful rulers on earth. Under the arches of the Grand Bazaar, spices, perfumes, coffee and silks made the city appear the "greatest emporium upon the face of the earth".

Long before oil dominated western interest in the Middle East, these exotic goods lured English traders into the Ottoman empire. In 1581, a group of London-based "Turkey merchants" received a royal charter granting them a monopoly on Ottoman commerce. The Levant Company, as it was called, established "factories" at Constantinople, Smyrna and Aleppo, and developed a profitable import business based primarily on silk fabrics and, oddly enough, currants  the brown gold of their day. So central was commerce to Anglo-Ottoman relations that the Levant Company also managed England's diplomacy in the region, making it for almost a quarter millennium the primary conduit for English encounters with the Middle East.

Astonishingly, no history has appeared of this influential organisation since 1935. James Mather has brilliantly stepped into the breach with Pashas, a vivacious vade mecum to the little-known operations of the Levant Company. Following the traders  or pashas  themselves, Mather whisks the reader into the souks and khans of the Ottoman empire, evoking at once a powerful sense of place and a real feel for the pleasures, pressures and profits that characterised the pashas' careers. Like many modern expats, they created self-contained little Englands in the Levant, hunting, playing cricket and drinking to excess. Yet, Mather stresses, they acquired more in the Middle East than sunburnt skins and personal wealth. Mixing among people of many faiths, writing copious observations for readers and correspondents back home, and bringing Arabic and Turkish texts back to England, the pashas helped shape British understanding of the Ottoman empire as an entity to be feared, respected and at times admired.

Mather's description of this cosmopolitan milieu chimes with recent portrayals of contemporary British India by William Dalrymple, among others, covering a time when relations between Europe and the Muslim world had not yet hardened into a familiar Victorian mould. Mather draws a pointed contrast between the Levant Company and its better-known contemporary, the East India Company. Where the East India Company raised armies of sepoys, collected taxes, and administered whole provinces  becoming, in Edmund Burke's famous phrase, "a state in the disguise of a merchant"  the Levant Company pursued its trade at the sultan's pleasure, and never sought territorial control. The Levant Company's "commerce", Mather observes, "in no sense led to colonisation". The pashas could hardly imagine "that the Muslim map would one day be painted in shades of imperial pink". After all, the king's own ambassador, presenting his credentials at Topkapi, found himself seized by guards, pushed to his knees, and his forehead pressed to the floor beneath the sultan's feet  a forceful reminder of where authority rested.

Mather makes a forceful case, and an appealingly well-written one at that. As with many attractive historical pictures, the rosy hues Mather illuminates sadly faded into black and white. By the time the East India Company governed parts of the Mughal empire, what held western Europeans back from encroaching into Ottoman domains was less an inability to do so than an unwillingness  compounded, for the British, with what seems in hindsight a stunning lack of interest. The French invasion of Egypt in 1798 changed all that, turning the Middle East into a prime arena of European imperial competition. Though the Levant Company itself may not have nurtured imperial ambitions, in 1825 it would be gobbled up by a British state that certainly did.

This points to what is at once the greatest strength and weakness of Pashas. It offers much more Levant than Company. For all the rich human detail, the reader craves analysis of corporate structures and practices. How, for instance, did the company compare with the greatest commercial concerns of the period, oriented not toward Asia but toward the Atlantic? All those alluring Levantine imports were overshadowed in the British economy by the massive Atlantic traffic of fish, fur, tobacco, slaves  to say nothing of sugar, which ousted currants as the scourge of English teeth. And it was in North America, not Asia, that colonisation and commerce truly walked in step. It seems impossible fully to take the measure of Britain's eastern trade in this period without situating it alongside that of the Atlantic  as Captain John Smith, a founder of England's first successful North American colony, knew more intimately than most. Just a few years before settling Virginia, he had been a slave in the Ottoman empire.

Mather frames his book as a response to the "clash of civilisations" arguments so prevalent in the wake of 9/11. As British troops are deployed in two predominantly Muslim countries, such a deeply felt plea for cross-cultural understanding continues to have its place. It is hard not to share Mather's hope that in "our post-imperial times" we may recover something of the cultural fluidity that characterised the pashas' age. But our world has never been post-imperial, and probably never will be. One can't help wondering, on putting down this elegant study, whether this is really the most important lesson to draw from Mather's book. Surely the greatest topical resonance held by the Levant Company's history does not lie with those distant Englishmen's capacity to appreciate an Islamic empire. It lies in the relationship of commercial to imperial power. Now, as western economies are declining in relation to rising Asian ones, Mather notes that Korean textiles and Chinese plastics fill the souks of Aleppo. We will not live to see how Asian historians two or three centuries hence may write about the decline of the west; instead we must hope their investigations will be as sensitive as this.

Maya Jasanoff's Edge of Empire: Conquest and Collecting in the East 1750-1850 is published by HarperCollins.