On 4 April 2011, Juliano Mer-Khamis turned up unexpectedly at the Freedom theatre in Jenin and went inside to talk with his students and staff. Usually he'd call ahead whenever he planned a return to Jenin, but this time, driving up from Ramallah where he had just premiered a new production of a play by Eugène Ionesco, he gave no advance warning.

An actor and director who had forged a successful film and stage career in Israel, Mer-Khamis moved to Jenin in 2006 to set up the Freedom theatre in the city's sprawling refugee camp, one of the most deprived areas in the West Bank. In his five years as artistic director, he had created a hub of cultural activity in Jenin and, by touring home-grown productions abroad, had given young people in the camp a sense that they had a voice in the world.

After nearly a fortnight in Ramallah, Mer-Khamis had a lot to catch up with at the theatre. A new class was opening at the acting school, and there were perennial financial problems to contend with – but first he wanted to see his family. His Finnish wife, Jenny Nyman, was pregnant with twins and due to give birth at any moment. He spent a few minutes chatting and joking with the acting-school co-ordinator, Rawand Arqawi, one of several women working at the theatre despite opposition from the local community. Then he picked up his one-year-old son, Jay, who was here with a babysitter, and set off home in his little red Citroën.

With Jay in his lap and the babysitter beside him, he drove out of the theatre's cramped courtyard and turned right. A hundred metres down the street, a man stepped out of an alleyway shouting "Stop! Stop!". His face was masked, according to the babysitter, and he had a gun – but in spite of this, Mer-Khamis stopped the car.

At first, he seemingly thought it was a joke – Jenin humour is notoriously rough. Then, realising the man was going to shoot, he swung Jay out of range. In the same moment, the man opened fire and shot Mer-Khamis seven times before retreating into the refugee camp's maze of narrow streets.

Back at the theatre, Arqawi heard the commotion and ran out to find Mer-Khamis slumped inside the car, bleeding heavily. The babysitter had been hit in the arm by shrapnel from a bullet but her injury wasn't serious. Jay was unharmed. An ambulance turned up a few minutes later. Arqawi got in with Mer-Khamis, who was still alive. He tried to say something but she was unable to make it out. Before they could get him to a hospital, the 52-year-old was dead, leaving Arqawi and his devastated colleagues to wonder who had killed him and why – and whether the theatre he'd worked so hard to establish could survive without him.

From the outset, it was clear that the Freedom theatre was a dangerous undertaking, but Mer-Khamis and his co-founders believed that the need for it in Jenin outweighed the risks. When it opened in 2006, there were no other theatres in the area and Jenin's only other significant cultural centre, a cinema, had been closed for 20 years.

In the heart of the West Bank's impoverished northern region, Jenin feels very remote from the administrative capital Ramallah, 60km to the south. Little of the development money that has poured into Ramallah in recent years seems to have made it this far north. When I made the short journey between the two cities, I felt like I was travelling from a boom town to a frontier outpost.

To get to the Freedom theatre, we drove through the dusty, uneven streets of Jenin city to the edge of the refugee camp. Established by Palestinians displaced during the foundation of Israel in 1948, the camp is now home to more than 10,000 people and its makeshift concrete buildings cover an entire hillside at the edge of city. The infrastructure is basic but functional and the houses I visited had electricity and plumbing. It looks more like a run-down part of town than a refugee camp.

Many of the buildings here are pockmarked with bullet holes – reminders of the chaos that gripped this place a decade ago. During the five-year period of instability known as the second intifada, when protests against Israel's policies escalated into widespread violence, Jenin camp was a stronghold of armed resistance. The Al-Aqsa Martyrs' Brigades, a coalition of militias associated with the political party Fatah, had a heavy presence here, and between 2000 and 2003, according to Israel, at least 28 suicide bombers were dispatched from the camp.

In April 2002, the Israeli Defence Forces (IDF) responded by invading the camp with bulldozers to flush out the militants within. TwenSty-three IDF soldiers and at least 52 Palestinians were killed in the fighting and many more were injured. The bulldozers left hundreds of families homeless. Piles of rubble marking where houses once stood can still be seen around the camp.

For the thousands of children growing up here (in a 2007 census over 40% of the camp's population were under 15), violence and its effects have been part of everyday life. When the Freedom theatre opened in 2006, many of the young people who joined believed in armed struggle against the Israeli occupation. Mer-Khamis and his co-founders sought to challenge that belief and provide a creative outlet for anger and trauma.

Under Mer-Khamis, whose forthright political views made him a controversial figure among Israelis and Palestinians alike, the theatre also set out to effect social change and challenge authorities on both sides. Students were encouraged to express the frustrations of their everyday lives in drama-therapy sessions, and on stage they tackled such issues as women's rights, religious fundamentalism and local corruption. An adaptation of Animal Farm, first staged in 2009, cast Palestine's political leadership as power-hungry pigs who end up no better than their former masters. Shortly before his death, Mer-Khamis had been working on an adaptation of Frank Wedekind's controversial 1891 play Spring Awakening, which was banned in Britain in the Sixties for its portrayal of teenage sexuality. The production never made it to the stage but news that it was being planned caused outrage in the local community.

In terms of its outward appearance, if nothing else, the Freedom theatre is an unassuming place. The entrance, on one of the main streets running through the refugee camp, is unmarked. The performance spaces and the acting school are housed in a couple of plain sandstone buildings which began life as railway storage units in the Ottoman era.

When I visited Jenin late last year, there was an air of restlessness about the theatre, as if a central mechanism had stalled and everyone was waiting anxiously for it to start moving again. Outside in the courtyard, a few students sat around under a tree, smoking and passing the time of day. Inside at reception, a young woman in a headdress surfed the web. Around her, the walls advertised past productions and work by students on the photography course. (As well as professional acting courses, the theatre offers courses in photography, film-making and creative writing.)

The main event of the afternoon was not a performance or a rehearsal: it was the arrival of a large group of Swedish theatre practitioners and enthusiasts who were coming to assess the fragile state of Jenin's only theatre.

Jonatan Stanczak, the new managing director and one of Freedom theatre's co-founders, led the group into the reception area for an introductory talk. Sketching out the pre-history of the theatre, Stanczak explained that Mer-Khamis's association with Jenin stretched back long before 2006 – in the late 80s, his mother, Arna, a Jewish-Israeli activist and social worker, came to live in the refugee camp. "Arna was a woman of Jewish heritage who challenged the Israeli-Zionist agenda from a very early stage," Stanczak said. "She was excluded from her family because she married a Palestinian man [Saliba Khamis] who she met in the early Israeli communist party."

In Jenin, Arna established four educational centres for young people in the camp and later set up a small community theatre on the top floor of a local family house. She named it the Stone theatre after the stones children from the camp would throw at Israeli army vehicles.

Juliano Mer-Khamis, who had served a term in the Israeli army before becoming an actor, joined his mother in Jenin to run a drama group and direct shows in the tiny theatre space. But he didn't stay there long. Arna died of cancer in 1995, a year after the theatre opened, and her son returned to Israel to resume his acting career.

In 2002, the Stone theatre was demolished by an Israeli bulldozer and several of the boys from Mer-Khamis's class died in the fighting. (Two former students had carried out a suicide attack on the Israeli town of Hadera the previous October, killing four women and injuring many others before being shot dead by Israeli police.) However, the memory of the theatre lived on and a few years later, as the trouble in Jenin was receding, a former student named Zakaria Zubeidi – who had led the Al-Aqsa Martyrs' Brigades in Jenin during the second intifada but later renounced violence – appealed to Mer-Khamis to return and set up a drama project for a new generation of young people even more vulnerable than the last.

In one way or another, everyone involved in the Freedom theatre has been affected by the years of unrest in Jenin. On my night in the refugee camp, I stayed with Kamal Awad, whose family lives in a small house near the theatre. A 23-year-old acting student with leading-man looks, he also works as a refuse collector with the UN Relief and Works Agency.

While Awad's mother prepared an evening meal of hummus and pickles, his father sat across from us in the front room with his head in his hands, rocking back and forwards and compulsively rubbing his scalp. During the camp invasion in 2002, according to Awad, his father received a blow to the head from an Israeli soldier that left him brain-damaged and unable to speak. The family have been unable to afford proper medical treatment so they do what they can for him at home. As the oldest son, Awad became responsible for the family. The situation also took a heavy emotional toll on him. "Before I started working with Juliano in 2006, I was aggressive and ready to fight," he said. But joining the Freedom theatre allowed him to step outside his anger. "As well as acting, I learned how to laugh about myself and make other people laugh. I learned how to be a better human being."

The core of the theatre's work is the use of drama as a form of therapy. In the safety of the rehearsal room, trained practitioners encourage students to share their experiences and work through them in role-plays and other theatrical processes. "The first role-play I did," Awad told me, "was about my father. It helped a lot to work through family problems on stage."

When Stanczak ended his introduction in the reception area, he showed us a video of a drama therapy session. In a dark room, individual students from the theatre acted out their feelings and urges while the others stood around them in a close circle. One student, a former militant, was holding himself responsible for the death of his sister during an army raid. Another student, whose violent home life had left him with a speech impediment, said: "I am pulling out the fear inside me so I can be free, so this thing inside my mouth will go away."

"Drama therapy is a safe way to deal with your own personal experience, within the art," said Petra Barghouthi, a drama therapy practitioner. "You don't face directly your experience, you deal with it obliquely, indirectly, either by using a story or role-play or movement or sound, or all different techniques of theatre."

Afterwards, Stanczak walked us through the main theatre space to a large blacked-out rehearsal room where a group of students were having an introductory lesson in playback theatre, an improvisational form that uses stories from the audience as material for drama and debate. The class broke up as we arrived and I asked Mahmoud al-Ghanim, who had joined the acting school a year and a half ago, what the theatre was doing for him.

"Everyone has problems in life – anger, sadness – and that's what I'm trying to articulate here," he said. "I can't cry outside, but on stage I can cry and shout and break things. It's the best way to express emotion."

When the theatre first opened in 2006, it had difficulty attracting people to take part in activities such as drama therapy. "Jenin refugee camp is a conservative and traditional community," said Barghouthi. "They still believe that if a person is suffering from psychological difficulties, it's something that is a shame. They don't believe they have to ask for help."

That the theatre was being run by someone from Israel made the challenge even greater. The younger people who didn't remember Arna Mer-Khamis or the Stone theatre viewed her son with suspicion. "We were wondering, what was this Jewish guy doing here," Awad recalls. "People thought he was a spy."

"My friends and neighbours would talk and say bad things: 'How do you work with a Jewish person who killed our children?'" says Rania Wasfi, an administrative assistant and the first woman to work at the theatre. "This was the biggest problem."

Attempts were made to burn down the building and members of the theatre were physically attacked. Leaflets denouncing Mer-Khamis were circulated, but gradually his charisma and obvious passion for the project won people over. He stopped young people in the street and urged them to get involved. When children eager to take part were obstructed by their parents, Mer-Khamis would go around to their houses and explain why the project was worthwhile.

One particular source of disapproval was the theatre's drive to get girls into the acting school. Within the conservative strictures of the camp, many women are discouraged from leaving the home, even to attend school.

"My family thought I was crazy for wanting to come here," says Suzanne Wasfi, a film-maker and photography instructor. "They told me I must be dreaming and refused to let me go. But then people, including Juliano, came to talk to my family and eventually I was allowed to come."

She wasn't the only one. Before Mer-Khamis's death, according to Rawand Arqawi, it had got to the point where the classes at the theatre were predominantly female. "We had to go out and look for boys instead."

What's striking about many of the productions devised and staged by the Freedom theatre is that they aren't restricted to anti-Israeli propaganda or representations of Palestinian suffering under occupation. Through his work at the theatre, Mer-Khamis was intent on creating a more nuanced picture of life in the West Bank.

"Actors, painters, musicians [have been] going out to festivals in Europe and showing the occupation in all its forms – the suffering, the economic situation," Mer-Khamis said in April 2010. "I think we forgot [to talk about] our own houses, children, wives … Now the youth have decided to say: 'We go out, discuss the wall and the checkpoints but we go out also with the impression of our own women, with the monolithic dictatorship of our society, with tradition and religion.'"

Questioning aspects of Palestinian society inevitably provoked anger. "Many people didn't like that we criticised our own society," Mer-Khamis said. "But this is the policy of the Freedom theatre. As well as criticising the occupation in all its atrocities, we should also able to look at ourselves."

Before Mer-Khamis's death last April, the theatre was busier than ever. It had around 100 students and 15 full-time staff, and the audience for its productions at home and abroad was increasing. Though a small operation compared with theatres in Ramallah and Bethlehem, it received a large amount of international attention and financial support for its size. In 2009, the then foreign secretary David Miliband visited the theatre and its guest book contains names of writers, actors and dramatists from all over the world.

Much of the goodwill towards the theatre had to do with its larger-than-life co-founder. "We went to 10 different theatres around the West Bank last March," a Swedish visitor to Jenin told me, "and everyone talked about Juliano. He was such an inspirational character."

The creative engine at the theatre didn't grind to a halt on 4 April 2011 – new work has been produced and undergraduate groups have been touring in Germany and the US – but it's clear that losing Mer-Khamis has hit the theatre hard. Student numbers are down, according to Arqawi, and many activities are on hold. Among those who left the theatre was Mer-Khamis's wife Jenny Nyman, who gave birth to twins shortly after the murder and is now living with her three young children in Israel.

To make matters worse, the theatre has found itself under investigation by the Israeli security service Shin Bet. In the early morning of 27 July, a group of Israeli soldiers broke into the theatre, smashing windows and furniture, and arrested two men – location manager Adnan Naghnaghiye and the theatre's chairman, Bilal Saadi.

Ten days later, acting student Rami Hwayel – who was playing Pozzo in a production of Waiting for Godot at the time – was arrested at an army checkpoint. A second raid on the theatre on 22 August resulted in the arrest of Naghnaghiye's brother Mohammed, a security guard at the theatre. Each was accused of taking part in the Mer-Khamis murder, but all four men were eventually released without charge and are now back at work. On 29 December, the amnesty deal offered to co-founder Zakaria Zubeidi by Israel in 2007 was revoked; it has since been reinstated but with restrictions and now Zubeidi is not free to leave the Jenin area.

Stanczak sees the break-ins as part of the "systematic harassment" of the theatre by Israeli authorities and alleges that his colleagues, whom he maintains are innocent, were treated inhumanely in detention. When I asked if he anticipated further arrests, he said he didn't know. "We never thought they'd come again after the first time. But this unpredictability is a reality of life here. It's what breaks people's spirits."

Four separate authorities – the Israeli and Palestinian police and the IDF as well as Shin Bet – have been investigating the case but as yet Mer-Khamis's murder remains unsolved. It has been the source of much speculation in the local and international media. The arrest of a local man by Palestinian police hours after the attack fuelled rumours that Hamas, with whom the man was believed to have links, had ordered the killing – perhaps in response to the negative portrayal of Palestinian authorities in Animal Farm – but Hamas denied the claims and the man was later released.

Some suspect Israeli involvement. Others believe that the murder was planned closer to home. An anonymous leaflet circulating Jenin in the weeks after the murder appeared to corroborate that theory. "He was not killed for a scene in a play," it read. "He was killed for the accumulation of his activities since he came here."

Stanczak questioned the leaflet's validity. "We don't think it's the same people," he said. "The organisation that signed the flyer hadn't been heard of before and hasn't since. It seems some people used the murder as an excuse to spread their propaganda and demand that almost all NGOs in Jenin close down." The fact that Mer-Khamis had arrived unexpectedly in the camp on 4 April casts further doubt on the notion that it was a carefully planned hit.

The speculation has done more harm than good, Stanczak said: it has only fuelled paranoia around the theatre, causing students to drop out and scaring away potential new admissions.

Rawand Arqawi, who worked closely with Mer-Khamis, echoed Stanczak's concerns but was keen to talk about what happened on 4 April. She took me to the spot where Mer-Khamis was killed, within a short walk of the theatre. We stood on a main street lined with parked cars. People wandered by, glancing at us.

"It was the same time of day, about 4pm," she said, "but that day the street was empty. No people. No cars." Apart from the babysitter, only one person reported witnessing the attack but was too far away to identify the killer.

Arqawi is clearly frustrated by the lack of progress in the case. She acknowledged that the local community has been conspicuously silent about the murder. She also pointed out that four separate investigations – three of them by highly capable Israeli organisations reacting to the death of an Israeli citizen – have so far failed to find an attacker who struck in broad daylight in the middle of a densely populated area.

Ultimately, she said, "if the killer is from the camp or outside, it doesn't matter. A man has been killed and we need to know who did it so that we can get back to normal."

While they await closure, Mer-Khamis's colleagues have been doing their best to carry on without him. There are reasons to be hopeful. In December, a second Freedom theatre space opened in Jenin city. Multimedia activities and after-school drama groups are opening up again and several new courses, including the one in playback theatre, have been added.

"We came very close to collapsing amid all the confusion and fear," Stanczak said, "but we have managed to ride through the storm." Mer-Khamis's "borderless, visionary, crazy way of looking at the world" can never be replaced, he admitted, "but I think some of that craziness and inspiration continues with the people he worked with for over five years."

Before I left Jenin, I sat in the sun-dappled courtyard with a small group of students and technicians and asked them how they felt about the theatre's future without Juliano.

"We believe it will continue," said Areej al-Ayasi, a shy young woman who joined the acting school just a week before Mer-Khamis's murder. "We must start from the beginning and build it up again."

Kamal Awad agreed and told me in Arabic how Mer-Khamis's death marked the true beginning of their cultural revolution. "Now we have a real challenge on our hands," he said. Others chipped in and Rawand Arqawi did her best to translate. She looked at the students fondly and then turned to me. "Juliano always told us: 'Don't give up.' He said theatre is a bridge to new generations, and if one generation dies it will continue in the next." Arqawi smiled. "So when Juliano died, we learned this from him."