Various manufacturers have tried to resurrect the concept of the old 35mm rangefinder over the past few years. None have been wildly successful and all have been very expensive. The idea of a digital rangefinder-style camera is to bring the quality and flexibility of an SLR to a smaller, more discreet package.

The key to replicating SLR quality in a small body is maintaining a large sensor. A joint effort between Olympus and Panasonic has produced a new camera standard called Micro Four Thirds. It's based on the existing Four Thirds system used in DSLRs such as Olympus' own, very compact E-420.

The Micro Four Thirds system preserves the same sensor size but has different mechanical specifications, allowing for a more compact body that places the lens closer to the sensor.

So close, in fact, that there's no room between the two for a traditional SLR reflex-mirror system. This leads to the PEN's one major flaw: it's an interchangeable-lens camera, just like a DSLR, but take the lens off and the sensor is completely exposed, just a couple of centimetres away from your oily, ruinous finger. This is terrifying. If you happen to touch it, a trip to your local repair shop to get it professionally dealt with will be your only option.

Being based on the original PEN rangefinder of the 1950s, the E-P1's styling is inevitably retro. It's very compact compared to a DSLR, although still bigger than any normal digital compact model. A surprising omission is an optical viewfinder, but fear not: you can buy one for $400 (though we've spotted it online for $145) and attach it to the flash hot-shoe.

The standard kit comes with a 14-42mm zoom lens, giving the same equivalent focal length of about 28-85mm as a standard DSLR kit lens. When it isn't in use, it needs to be manually retracted by twisting the zoom ring anti-clockwise while holding a locking catch open. To take a shot you need to manually twist it back out again, extending the lens past the catch position.

Beyond the retro styling, the PEN is totally modern. Switch it on and you're greeted by a menu system based on Olympus' DSLRs. Buttons and controls are more or less identical too, with mode dial at the top left and the standard array of control buttons at the back beneath your right thumb.

When it comes to taking photos it's functionally identical to a DSLR too, with three exceptions. First, you need to use the screen to frame your shots unless you've bought the optical viewfinder.

Second is the slight start-up lag. From hitting the On switch to the screen coming to life takes a little less than two seconds; not the end of the world but a lot slower than a DSLR, the majority of which have no appreciable power-on delay.

The third occurs when pressing the shutter button. The autofocus uses a contrast-detect scheme rather than the separate optical system a DSLR can employ.

That increases typical autofocus time to around one second and shot-to-shot time to about 2.5 to 3 seconds, giving it a feel frustratingly closer to a compact than a DSLR. You can mitigate the shot-to-shot time with burst mode, though, which in our tests managed a little over three frames per second for eight shots in RAW mode or around 20 shots in JPEG.

Image quality is every bit as good as the Olympus E-420. It's far superior to any digital compact, with greater dynamic range, better ability to capture the subtleties of light and lower noise. But, as with standard Four Thirds DSLRs, the smaller sensor in comparison to APS-C or full-frame DSLRs is a limiting factor.

There's a slightly greater tendency for highlights to blow out, and noise performance at high ISO isn't quite as good as the best of the current bunch.

Having said that, it's a country mile better than any compact model. Results at ISO 800 sparkle with detail; ISO 1600 is perfectly usable; and even ISO 3200 is acceptable. Force it to ISO 100 and contrast, colour reproduction and detail are lovely - only someone used to a full-frame DSLR could seriously find fault. And if you want to extract a little more detail than default JPEGs, you can shoot in RAW mode and squeeze a little more out of it.

It's just as well that low-light performance is good, since - just like an old-style rangefinder - there's no integrated flash (the PEN-specific one from Olympus will set you back $270. But, unlike a rangefinder, the E-P1 will shoot superb HD video in 720p at 30fps. Autofocus remains active too if you want, although it's clearly audible on the soundtrack.

The E-P1 does lots of things very well and, just as important, it's great fun to use too.

The shutter lag is frustrating, though, it isn't quite as compact as we'd truly like, and then of course there's the price. In short, it isn't the ideal universal travel camera, but if you've been waiting for a true rangefinder-style digital at a vaguely sensible price, the PEN E-P1 fits the bill.