Pastor's son Martin (Leonard Proxauf) wears a ribbon as a reminder of purity in Michael Haneke's film The White Ribbon. (Films du Losange/Sony Pictures Classics/Mongrel Media)

Michael Haneke, the Austrian auteur who shredded our nerves with 1997's brutal Funny Games (remade in English in 2007), has grown much more circumspect. His brilliant new film, the 2009 Palme d'Or winner The White Ribbon, is no less disturbing, but it keeps its horrors behind closed doors. It's a dour tale of dirty secrets and religious repression, of hypocritical adults and scary, enigmatic children. At times, it comes off like The Village of the Damned as conceived by Ingmar Bergman.

Michael Haneke's brilliant new film is a tale of dirty secrets and religious repression, of hypocritical adults and scary, enigmatic children.

The village in this film is Eichwald, a quiet backwater in northern Germany, in the years just before the First World War. There, a series of unsolved crimes – from malicious acts of mischief to the vicious beatings of two young boys – expose the rot beneath the villagers' prim Protestant exteriors. The first victim is the local doctor (Rainer Bock), who is injured after his horse trips on a wire strung between two trees. The kindly, widowed physician seems an unlikely target – until we learn of the sordid goings-on in his household. A past affair with the village midwife (Haneke regular Susanne Lothar) has secretly produced a child out of wedlock. Now, he callously spurns the aging woman in favour of groping his own budding daughter (Roxane Duran).

The other pillars of this semi-feudal community are equally shaky. The local baron (Ulrich Tukur) puts on a show of benevolence but has scant regard for his employees. After a peasant woman dies during an accident in his sawmill and her husband kills himself in grief, the baron's pretty young son (Fion Mutert) is the subject of a sadistic attack that suggests an act of vengeance. Then there's the pastor (Burghart Klaussner), a chilling exemplar of tough love. He metes out corporal punishment to keep his brood in line while reserving his doting affections for his pet canary. You can guess what happens to the bird.

The film is narrated as a memoir by the village's elderly former schoolmaster (Ernst Jacobi). As a young man (played onscreen by Christian Friedel), the teacher tried to discover who was behind these seeming acts of retribution. A husky, floppy-haired fellow with a pince-nez, he recalls Mark Twain's amateur detective Pudd'nhead Wilson. Only, his sleuthing doesn't get very far.

As in his previous work, Haneke refuses to pander to our expectations of what a movie should do. There are never any tidy explanations. His intellectual films are often constructed more as arguments than entertainments, even as they skillfully manipulate the techniques of suspense. If you accept that conceit, you'll relish a riddle like The White Ribbon or Haneke's unsettling predecessor, 2005's Caché. If you don't, you'll be disappointed.

One thing is evident from The White Ribbon's historical context: Haneke is giving us a foreshadowing of the German character in the first half of the 20th century. The country is about to enter into a war that was essentially a bloody clash of national egos, ending in Germany's humiliating defeat. More significantly, the children who figure so prominently in this movie will be adults during the Third Reich. In their hard faces and moral certitude, you can see future Nazi sympathizers.

The leader of the kids is the pastor's daughter, Klara (Maria-Victoria Dragus), who already has fascist tendencies. Leonard Proxauf, who plays the pastor's pubescent son, Martin, has one of the most troubling young faces I've ever seen. To keep him from masturbating at night, the pastor ties the boy's hands to his bed frame – a shame he accepts like a martyr. In the daytime, the pastor's children are made to wear white ribbons as constant reminders of innocence and purity.

Anna (Roxane Duran) is the victim of a sordid relationship with her father, the village doctor (Rainer Bock). (Films du Losange/Sony Pictures Classics/Mongrel Media)

There are some pure innocents among the young people. They include the doctor's little son (Miljan Chatelain), who in a striking scene grapples for the first time with the concept of death. And Gustav (Thibault Sérié), the pastor's younger boy, who tries to comfort his papa by giving up his own pet bird. There is also, in the midst of the sinister events, a sweet romance between Friedel's teacher and the shy Eva (Leonie Benesch), the new nanny hired to care for the baron's infant twins.

Haneke uses mostly unknown actors, or ones little known outside Europe. That gives the picture a kind of purity, too — the actors look as though they belong to the time period. The few familiar performers, such as Tukur (who co-starred in the Oscar-winning The Lives of Others) and Klaussner (who played the judge in The Reader), are outstanding. Klaussner in particular is icy perfection as the pastor, making the character an ugly amalgam of puritanical severity and New Testament sentiment.

The film, designed by Christoph Kanter, is a breathtaking re-creation of its period and place, employing images that appear as though they've been dredged up from the beginnings of cinema: a village festival, for example, or reapers mowing a field. Shot in exquisite black and white by cinematographer Christian Berger, these rural idylls look like they belong in a film by Alexander Dovzhenko or Carl Dreyer. Some critics have referred to The White Ribbon as an "instant classic," and while that contradictory term is nonsense, the film has the look of a classic – and, more importantly, the resonance of one.

Haneke has found, almost 100 years in the past, a subtle modern parallel. In The White Ribbon, we see the kind of rigid thinking and moral superiority, inculcated in youth, that can lead not just to fascism but also to the religious extremism fueling many of today's young terrorists. You don't have to dwell on that connection, however, to appreciate this severe and haunting film.

In German, with English subtitles.

The White Ribbon opens in Toronto on Jan. 15, Vancouver on Jan. 22, Calgary, Edmonton and Montreal on Feb. 5 and Ottawa on Feb. 19.

Martin Morrow writes about the arts for CBC News.