The latest addition to London's skyline stands 7m tall, has a tail 8m long and has a prime site on the Thames opposite the Houses of Parliament and St Paul's Cathedral.

From her lair on the roof of the South Bank Centre, a giant straw fox named Susan stares down at the bustle on Waterloo Bridge and quite a few pedestrians stop to stare back. But many don't. That's London these days: where whimsy is mainstream, and, to challenge is the norm, you can expect the unexpected.

Art group Pirate Technics say they built Susan - commissioned for the 60th anniversary commemorations for the Festival of Britain - partly because there's a long tradition of straw sculptures in England but also because the fox is an animal with heaps of personality.

But is a giant straw fox art? And should we care?

"I'd say it was art. I don't think it is high art, it's more having fun and giving people something to look at and think, 'That's fun', rather than 'Humm, interesting'," Mike de Butts of Pirate Technics, told the Herald.

"I think it appeals to everybody at different levels."

Pushing the boundaries - and having fun - is something London does well. Far better than Paris, with its stuffy art institutions, Berlin, with its irony deficit, and Rome, which looks as if it last drew a fresh breath in the 1950s. Across Europe, only the buzzy Catalan city of Barcelona looks as if it can give London a run for its money.

From the notorious "pile of bricks" by Carl Andre and Tracey Emin's unmade bed with dirty sheets to Damien Hirst's pickled shark and Chinese artist Ai Weiwei's million individually-crafted porcelain sunflower seeds, London's take on the arts is what creates the headlines and makes others want to follow.

For the general public, the epicentre for modern art in London is the South Bank, a stretch of revitalised embankment that is home to the National Theatre, the Hayward Gallery, the Festival Hall, the National Film Theatre, the Globe Theatre (a reconstruction of Shakespeare's base) and the Tate Modern, a former power station dazzlingly converted into a museum.

Also big on the radar screen is Trafalgar Square, once an island lost in a sea of traffic that became wonderfully humanised by street pedestrianisation. Here, artists can show their works on an empty plinth in the square's northwest corner. The site shot to fame in 2005 with Alison Lapper Pregnant, a marble sculpture by Marc Quinn of a thalidomide victim with no arms.

Look further, though, and art is thriving outside the city centre, and not just in the bourgeois-bohemian strongholds of Hampstead, Highgate and Camden. Helped by the "Brit Art" phenomenon of Emin and Hirst in the 1990s, art of the cheap, subversive or graffiti kind now permeates the old Cockney heartlands of Bow and Hackney.

It has even spread to Peckham, a southeastern borough whose reputation for high crime and poor housing previously made it a butt for poor jokes.

A disused cricket-bat factory on a Peckham industrial estate, transformed as the Hannah Barry Gallery, is firmly established on must-see tour for visiting artists and solid proof that art can bring economic benefits.

"There are lots of different scenes in London and, in terms of cutting edge, it has quite a good underground scene as well," says South London painter and public mural artist Jason Gibilaro.

"I think it is important to have a good underground scene because it keeps the art world alive, stops it becoming less retro. Everything is evolving."

This view of culture as a rugged Darwinian process, advancing by natural selection and occupying favourable habitat niches, is widely heard in London.

Experts say a large part of London's success can be put down to several factors.

There is its huge and varied population - nearly eight million, almost a third of whom belong to various ethnic minorities. There is its housing market, which in poor boroughs offers affordable accommodation to penniless students and up-and-coming creators willing to hole up in rundown Victorian houses or flat-share with friends.

But there are also, less tangibly, traditions of tolerance and openness and a desire to experiment, argues Munira Mirza, adviser for the arts to the Mayor of London, Boris Johnson.

"London is a constantly evolving hub between east and west, where people come together from all over the world, bringing different traditions and ideas that cross-pollinate to create hybridised forms," Mirza told the Herald in an email.

Londoners themselves are prone to whinge about their city, not least about its chronically bad transport system, knife crime and a growing sense of incivility.

But scratch the surface and, in many, you will find a deep pride about London's status as an incubator of culture, in theatre and writing as well as arts. Jerusalem, a play by Jez Butterworth, about a charismatic, manipulative Wiltshire yokel, has taken New York by storm after starting as a downstairs production. War Horse, an adaptation of a novel in which horses forced into the combat of World War I are played onstage by giant puppets, is being turned into a film by Steve Spielberg after winning five Tony awards on Broadway.

With success, though, comes intriguing questions.

Urban art, by its own definition, is ephemeral. The creators of Susan the Fox are respecting this by deciding to set the work on fire in September.

In contrast, graffiti by Banksy, a scruffy unidentified Bristolian whose street art is full of wit and political sharpness, is being preserved as if it were a national treasure. In Islington, his stencil of three children saluting a flag made of a supermarket bag, Pledge Your Allegiance to Tesco, has been repainted again and again in a desperate attempt to save it from "vandals".

Another dilemma is the nature of avant-garde itself. How do you maintain its special ingredients? If they come from the grass roots, should they - can they - be nourished by help top-down? For critics, danger lurks in the "London 2012 Cultural Olympiad", coinciding with next year's Olympic Games. After all, when the authorities use bus shelters to showcase digital commissions by "established artists", it's surely time to run.