Photo by Vera Marmelo

There is a vertiginous feeling to the festival's opening set, by Akira Sakata and Giovanni di Domenico. As I stand there in Barreiro's Be Jazz bar watching the veteran free jazz saxophonist and his young Italian collaborator, it starts to remind me of Hanna-Barbera cartoon – an anthropomorphic cat tumbling perpetually down some endless flight of stairs.

The pair pause twice in a 40 minute set. The second number begins a little more tentatively, more atmospherically. Domenico gets his hands under the piano lid, striking at the strings. Sakata switches up his horn for two small bells, most grinding them, icily, together. Before long, the former is back pounding the keys and the latter wailing with clarinet. It starts to remind of Krystof Komeda. I'm picturing something tense and unpleasant on a boat, with a knife. By the end Sakata has got his death metal growl on, bringing up great guttural rasps from the depths of his throat while his partner ripples tremulously beneath.

"This is an experiment," Matana Roberts says as she begins her set upstairs in the hall of the city's jazz school. "This is an improvisation." But for extempore playing, she exhibits a remarkable sense of structure. Occasional hesitancies in the flow are more like those of a storyteller who knows where they are going and the general shape of the tale but searches sometimes for the mot juste.

But there is a paradox here. The method is modernist. It is collage, drone, noise, harmolodic, extended technique, electronic, merz. The subject, thought, is tradition, composed of a dense skein of research and historical reference. Perhaps, still, we have no need to invoke Schwitters and so on. We can simply call this performance a séance, throughout which Roberts is inhabited and possessed by a multiplicity of voices, each one more stirring than the last.

In the last ten minutes of the first night's closing set, suddenly everything takes off. Its hard to put a finger on exactly what happens but suddenly everybody in the room just feels it. People in the crowd start whooping and cheering. Afonso Simoes's drums are skittering feverishly. Miguel Mira saws furiously on his amplified cello. And the sounds coming out of Pedro Sousa's sax seem to flutter and warble like an aviary on fire. It is like being present at a rocket launch. A magical moment.

Out Fest is now in its 12th annual edition. It began, festival director Rui Pedro Damaso tells me, out of "sheer enthusiasm. Me and Vitor [Lopes], who have been at the core of the festival team since the beginning,were in our early twenties, we were playing together (as Frango), discovering a lot of new music, and also really excited about a lot of great new bands happening at the time in Barreiro and in Lisbon especially, but also in Porto, so we just decided to finally make a festival." They had no particular model in mind, little funding, and few concrete aims. As the years passed and the festival progressed, it defined itself through practice, quietly emerging as one of the most distinctive and exciting festivals in Europe.

Barreiro could be called Portugal's very own Detroit. A once mighty industrial powerhouse, now in seemingly terminal decline. Just across the Tagus from big brother Lisbon, with no bridge of its own a commute to the capital still means either a 45-minute roundabout drive – or a boat. Empty, dilapidated buildings abound in a town centre ring-fenced by wasteland. Even on a Friday night, the streets are largely bereft of young people.

On the second day we left behind the jazz club in the old town and headed deep into the industrial zone. A vast neighbourhood of crumbling concrete warehouses like the ghost of some Hollywood studio lot from the Golden Age. The concert itself takes place in a former factory now become a museum. The walls around the bar are decorated with dozens or prizes and certificates from industrial exhibitions around the world dating back to the middle of the nineteenth century. In the main hall, the stage is flanked by towering iron girders, gantries and pulleys, and a diesel motor the size of a Trident submarine.

Onstage, AMM are dressed in black. John Tilbury is sat at the piano while Eddie Prévost commandeers a snare drum, tamtam, and a huge bass drum. It begins as delicately and subtly as can be, Prévost bowing softly on the edge of his gong as Tilbury picks out tender little Feldman-esque trills. About half an hour in they seem to get taken over the spirit of the place. Prévost places a cymbal on his bass drum and pounds it with one beater while using the other to mute and modulate the resonance from the drum skin. Meanwhile, Tilbury has one hand inside the piano at the strings, the other striking great cluster chords on the keys. Drums and piano blend inextricably together in one great industrial clang.

It's a relatively brief moment, but a powerful one. A wild and fleeting interruption in a set otherwise notable for its deep sense of serenity. The pair place sounds precisely in space and gently bat them back and forth or leave them there to twinkle. Music has rarely sounded so wise.

But it's Vladislav Delay, an hour later, who sounds most in keeping with the history of the room – even if he looks, in grey vest and tracksuit bottoms, more like he's on his way out for a run. Scarcely an identifiable pitch sounds through his hour-plus set. Instead he slices up white and pink noise like cake and sends the pieces careening through the speakers like pistons on their points. It builds to a heaving, densely textured sound mass. It's Jaws chewing through static. Balloons made of sandpaper. Finally, the whole thing subsides to a tremulous chord floating on the clouds amidst vapour trails of reverb dissolving into dew.

On Saturday, the venue is an old firehouse down by the waterfront occupied by artists and converted into studios. Tonight, every room is an installation. Sculptures and paintings adorn every available surface, constructed of every conceivable material. Over the course of the evening, 14 different acts perform in different spaces about the building. But the building is like a performance in itself.

Local youths Rabu Mazda and Van Ayres prove their Wu credentials by playing before a backdrop of clips from samurai films and 8bit arcade games. Their music is equally crunchy and bitmappy, the beats almost recognisably dubstep but way more punky and lofi than any dubstep I've heard in a while, deconstructed to the point of disintegration. I don't know what make of laptop they had but it sounded like an Amiga 500 with a fucked soundcard.

In a room whose ceiling supported half a dozen Japanese-style fans made into Calder-esque mobiles and whose walls bore a snaking double helix made of flowers, Cotrim sprawled upon a rug on the floor and seriously abused a bunch of records, from ELP to the Sound of Music to The Champs via various random bits of soul, funk, and free jazz. He slams the needle onto these disks, violently manipulates them as they spin, interspersing the resulting chaos with some circuit-bent Casio bleeps and laptop-generated noise wall. The results are nasty, brutish, and tremendous fun.

Apparently, after a recent gig, someone told Russell Haswell that his set was too populist. They may have meant it sarcastically but evidently he took it to heart because tonight his set is like a boot stamping on a human face, forever. What's exciting about Haswell's use of his modular set-up is that at the point where most people go, oh shit I should dial that back real quick, he thinks, yeah, let's go with that. As a result, he is able to push the gear into zones it doesn't usually get to.

Caveira channel all the best bits of New York no wave – from DNA to the Contortions – into something still distinctly new. A four-piece fronted by Pedro Sousa's howling sax and the skronking, searing guitar playing of Pedro Gomes, still it is as if there are no individual members at all in this band. There is just this sound and that sound resembles a warzone in fast-forward.

Sunday evening finds us back at the jazz school, now temporarily converted into Laraaji's peace garden. I arrive about 15 minutes early and find the Philadelphia-born dulcimerist already on stage, sitting cross-legged on an oriental rug, tweaking his electronic equipment. Between the stage and the five row of seating, more rugs and throw cushions have been laid on for anybody feeling the need for a less formal posture.

It's hard to say exactly when the concert starts. At a certain point, around five minutes before the appointed time, he starts slowly picking out a few notes on the dulcimer but you'd be forgiven for thinking he was still tuning up or something. No lights come on to illuminate his face nor do the house lights dim. A little while later, he stops for a bit and says hello, inviting us to take a walk in his peace garden, and expresses his hope that we might all get "as relaxed as we dare to be". Whether we do so sitting down, lying down, or "floating on the ceiling" is, happily, left up to us.

When he asks us to join him for some call-and-response chanting, a dreadlocked white dude sitting on the floor assumes the lotus position. "lum lum lum lum lum-a-lum lum," sings Laraaji. The balding bloke in the Adidas top sitting next to me is having none of it. Laraaji thrums upon his strings, processing the sound through fog banks of reverb, chorus, and phasing effects. The music has a vague, fleeting quality, as if glimpsed through a rearview mirror. It seems to elude one's grasp.

As it comes to an end, quite a few people are lying down (I'm unsure quite how many are floating on the ceiling) and I'm surprised to discover it lasted as long as a feature film. If someone had told me it lasted anything from 20 minutes to eight hours, I would probably have believed them.

The following day, on my way to the airport, I find myself pondering what, finally, it is that makes Out Fest so special, so precious in an already saturated European festival scene. Ultimately, I think it comes to down to the event's rootedness in the community of this town where you could buy a house outright for less than the price of a deposit on a one-bed flat in London.

The organisers of this festival were born here in Barreiro, they grew up here. From its first incarnation, local artists have figured highly on the bill. The emphasis on having international guests like Eddie Prévost and Russell Haswell run workshops during the day when no concerts take place, nurtures an already rich local scene. At least one of the bands playing this year first met during Carla Bozulich's workshop at last year's festival. Throughout the year, the Out.Ra association that organise the festival run projects to restore rundown and abandoned schools in the city to become new cultural venues.

"I think that through the years we have mostly been unearthing the potential which has been there since the beginning," Rui Damso tells me, "both in terms of the music and of the interaction between the city and the festival. It's mostly been a process of learning and figuring out how to keep this identity whose seeds where there since the beginning but had to be tried out and developed, which has led us to have a very professional and careful outlook on each edition. I'd say that now, twelve years after, it's very clear in our minds that the festival's core identity is to mirror the attitude that's present in the music: to try new solutions, to explore the spaces, to rearrange its building blocks, to be unique."