Briton's labyrinthine installation is already the toast of Venice

As the gates of the Venice Biennale swung open yesterday to the world's press, assembled critics raced to a single destination: the British artist Mike Nelson's labyrinthine installation.

Every two years, the artworld converges on Venice to see national exhibition pavilions compete in venues across the city. Nelson's pavillion, already championed as Britain's most ambitious entry ever to the Biennale, is being talked up as serious contender for the Golden Lion award, given to the Biennale's best national pavilion.

Nelson, 44, working with the British Council, has spent £300,000, employed at least six staff, and worked on site for 12 weeks to convert Britain's neoclassical pavilion – occupied every two years by a different British artist – in to a warren of rooms. These are interrupted by an entire building facade inside a central courtyard, for which Nelson has removed the pavilion's roof. Critics have already been wowed by the artist's ambition, sense of scale and capacity to unnerve.

"Bet you £50 he wins the Golden Lion," said Ben Lewis, a critic with BBC Two's The Culture Show. "It's a masterpiece. He's like a Hollywood director, working in contemporary art. He's in to these ontological feedback loops which you see in Inception or The Matrix. It's a building inside a building. You are continually wondering where you are. It's really like a film set; it's perfectly translated into art terms. The materials are very evocative. He's absolutely brilliant at doing a psycho's lair; but it's much more than that."

Yesterday, Nelson batted away criticism that his installation – which references an earlier 2003 artwork from the Istanbul Biennal, and uses materials from Istanbul and Venice – has no relevance to contemporary British life. "The aesthetic of it is no different to an estate in the East End, or somewhere around Silvertown, it's really not that dissimilar," he said. "[Buildings like this] exist in every culture... the discrepancy in wealth between Istanbul and Britain now is very small. In 15 years Istanbul will be as wealthy as London. That's what interesting to me is the change in that city."

The British artist's effort is just one entry out of 89 countries competing during the event, which opens to the public on Saturday. Countries exhibiting for the first time include Haiti, Saudi Arabia and Bahrain, all of whom, as well as being recognised for their work, hope to take advantage of the art world's most elite players' presence in town, all here to network and strike deals.

Pavilions housing the work are split between the city's gardens, the Arsenale, a former complex of shipyards, and the city at large.

The scale of Mike Nelson Venice entry this year dwarfs Britain's 2009 outing, a video work by Steve McQueen, and Trace Emin's exhibition in 2007, containing drawings, paintings, and installation work.

Nelson was born in Loughborough in 1967 and has twice been shortlisted for the Turner Prize, first in 2001, when he was beaten by Martin Creed, and then in 2007, when Mark Wallinger picked up theaward.

"It is one of the most radical reworkings of the British pavilion in many years," added The Art Newspaper's editor, Jane Morris. "It is a huge, immersive, atmospheric, olfactory experience. Not surprisingly, it is generally agreed to be one of the must-sees of this year's Biennale."

Venice Diary: Welcome to the psycho's lair: Mike Nelson at the 2011 Biennale

Steaming over Vaporettos

For those artists without a private motor launch, it was a case of up the canal without a Vaporetto yesterday, after Venice's water bus transport workers decided to use the first day of the Biennale to launch a city-wide strike. While the Grand Canal appeared more serene than normal, most competitors and visitors at the Biennale were forced to tramp about the maze-like streets by foot, leading to some sweaty, late, angry looking artistic luminaries.

US entry in the running

Some of Mike Nelson's most pressing competition for the Golden Lion comes from the US Pavilion, which won the award in 2009 for an entry by Bruce Nauman. This year, Puerto-Rico-based artists Allora and Calzadilla combine the themes of sport and war in their exhibition Track and Field, which sees a huge overturned military tank topped by an athlete on a running machine. As the athlete runs, the tanks tracks spin. The noise dominates the otherwise tranquil sounds of birdsong in the Giardini.

Egyptian's moving work

Egypt's entry comes from the deceased artist Ahmed Basiony, shot and killed during a pro-democracy demonstration in Cairo's Tahrir Square in January. His show, 30 Days of Running in the Place, interposes video of the artist running on the spot, taken from an earlier work, with footage shot by him of the Cairo demonstrations in the days before his death.