There are cult stars and then there are cult stars. Will Oldham, born in Louisville, Kentucky, in 1970, is one of the great enigmas of music. His first five records, appearing from 1993 onwards, were released under variations on the Palace moniker - Palace Brothers, Palace Songs and Palace Music - and established him as a talent and someone secure enough in his eccentricities to take on the music business, even if from deep within the indie world. In 1999, with the release of the breakthrough album I See a Darkness, he lit on a new name, Bonnie ‘Prince' Billy, and has mostly stuck with it ever since. The Oldham career is a guerrilla operation based on a big underground following, heavy rock-critic recognition, a film career - he was originally an actor and can be seen in John Sayles's Matewan (1987) - and a community of musicians who revere his work and who he records with, supports and, in his otherworldly words and ways, can be said to move among.

His previous two releases offer precious few clues to where Oldham has arrived at with Lie Down in the Light, in that each record he makes is a tack away from the one before. He is often in the studio, either working on his own material or making guest appearances that filter out on small labels. This, plus a constant touring schedule, has him plugged into the most hip recording scenes around. The Letting Go (2006) was recorded in Reykjavik, Iceland, with Björk's studio collaborator for the past ten years, Valgeir Sigurðsson. It is an austere, ghostly, string-driven folk album, with half a dozen good songs on it. Ask Forgiveness (2007) is a very sparsely instrumented eight-song EP, recorded in Philadelphia with Espers members Greg Weeks and Meg Baird. Except for one original number, the songs are an eclectic mix of covers, from Phil Ochs to Glenn Danzig via Björk and the R&B star R Kelly. The record's packaging contains no list of song titles or musicians, and visual information is confined to seven full pages of photos of children from (at a guess) either Tibet or South America. The EP slipped out in Australia in the week before Christmas.

Given Oldham's recent wanderings and his reunion on this album with the engineer Mark Nevers in Nashville, Lie Down can be seen as a homecoming. It is also the best set of songs Oldham has had for some time. The inspiration is hard to discern: did the songs choose the studio, or did Nevers' studio and his approach help spawn the songs? The spark is there from the first guitar strums and the tickled, rich singing of the opening lines: "When there's just one thing I can do / You know I don't want to go through with it / When there's just one thing to get through / You know I don't want to go through with it." It's the Oldham philosophy distilled, right down to the song's title, ‘Easy Does It', which encapsulates the sound and approach of the whole album. It's as if, with this record, Oldham has let go and - along with some fond self-contemplation - turned his mind to his family and his first loves in music, and made one of the sweetest and best records of his career.

The album has 12 songs, which is perhaps two too many for perfection. A pair of very strong numbers braces the record: ‘Easy Does It', at the start, and the title track, at song ten. Between them, Oldham weaves clusters of songs. ‘You Remind Me of Something (Glory Goes)', ‘So Everyone', ‘For Every Field There's a Mole' and ‘(Keep Eye On) Other's Gain' are philosophical musings in his stilted but still understandable style: "For every mole there's a hole with the soil that he stole and the sightlessness that lets him go free." A stretch of love songs follows, beginning with ‘You Want that Picture', a clever turning on love and love-song clichés. Two poignant and perhaps autobiographical departure tracks are next, with the opening line of ‘Missing One', "I know that missing you has just begun," setting the tone. A blazing rock song without drums breaks the spell. And then comes ‘Lie Down in the Light', with its closing lines, "Time and again one of us falls behind / It's as if we tried to know what we can't really know," seemingly a fitting place to end. Two further songs cloud the waters, going off to gospel and God.

The key to Will Oldham appreciation is working out what to take seriously and what is obscurantism and game playing. Judging him is always difficult. The songs across his career are generally good, and the instrumentation mostly interesting, but his artistic intentions can be hard to fathom. The game playing takes place on and off the records. For a start, there is the minimal, disorienting folk-art packaging, the lack of standard credits on the sleeves and the deliberately unattractive ‘promotional' photos, one of which shows him down by a river in very thin underwear, belly protruding. Strangeness and knowing anti-show-business tactics are pushed to the fore. Meanwhile, his music can welcome, but it can also repel. His songs often have a sketchy, first-thrust feel to them, reinforced by the low-fi recording. But at heart he's a traditionalist: a Southern boy with an encyclopaedic knowledge of music who can sing frankly of sex in his life while still referencing "the Lord". Oldham intrigues even in his inconsistency, the crossed wires that distort the image of the serious singer-songwriter and how he appears to the world.

The sound of Lie Down in the Light is glorious folk-rock, which is not only easy on the ear but also serves to sugar-coat the unconventional lyrics. Oldham himself perfectly describes the sound in ‘Easy Does It': "good earthly music". And how many great records fall into that category? The best of Neil Young, The Band, Fairport Convention, American Beauty-era Grateful Dead, and swathes of late-'60s to late-'70s country and folk. It's the warm steel-string acoustic guitars, the judicious use of pedal-steel guitar, deep bass, some fiddle, organ and piano, and voices - the lead vocal up high so every word is heard, and harmony vocalists cushioning the singer. On Lie Down it's Ashley Webber, a touch more country in her phrasing than other female vocalists Oldham has worked with recently, and Emmett Kelly, the guitar player with his classic high winsome harmonies. To get all this right and then down on tape, you need the right studio and a sympathetic engineer-producer. Mark Nevers, with his vintage-gear-filled suburban house, long a favourite with adventurous alt-country and rock musicians, offers just that. And the album, deep and laidback, is a joy to listen to.

The fascination with traditional music, be it country, folk or blues, is one of the strange tics of indie taste. The apparent simplicity and authenticity of the music is a reason for its appeal, as are the timeworn truths and mythmaking of the lyrics, which rock music obsessed with rebellion (no matter how dated) and adolescent sexuality seems to bypass. The sound of old recordings also attracts, whether it's the scratchy, dangerous blast of the '20s and '30s, the vitality of early rock and '50s blues, or the camp orchestration and earthy grooves of '60s and '70s country. Jeffrey Lee Pierce, with his band The Gun Club, picked up on this in the early '80s, and Jack White of The White Stripes is heir to Pierce's approach. When Will Oldham appeared, in the early '90s, this blending of indie and the traditional was well underway. Beck was in on it, and Uncle Tupelo too, who morphed into Wilco and Son Volt while kick-starting the alt-country movement. This is Oldham's background, and the source of his melodies and his approach to song structure.

His strength is as a melodist. For someone with a confined vocal range and a guitar technique of no great virtuosity, Oldham manages to maintain a constant flow of quality songs. He has the knack of taking two or three chords and then spiralling the song out from a beginning you've heard before. He has great fun with melodic structures, letting strands and new ideas come into a song and then developing them convincingly to create something unique. He is not lazy, or happy to coast on roots-music clichés and become a John Prine wannabe. He is too dangerous for that, and his incorporation of rock music allows him to turn songs derived from folk or country rudiments into something weirder and thornier, without losing the power of the traditional sources. Examples abound on this album. ‘Missing One', after an instrumental opening that never repeats, drops into a double verse and double chorus before going into a longish instrumental passage, followed by a verse with a new melody, then a repeat of the first verse, before an abrupt ending with a sung section of part of the long instrumental bit. Confusing and unconventional: yet it echoes the dysfunction and change suggested in the song's lyrics.

Lie Down in the Light is a charming, winning album by an artist whose work can be difficult to access. The lightness of the record is not to its detriment, and it joins I See a Darkness (1999) and Ease On Down the Road (2001) as high points in the Bonnie ‘Prince' Billy catalogue. There are those who cling to their Dylan, Joni Mitchell, Springsteen and Van Morrison, bemoaning the lack of singer-songwriters possessing a seer's edge. These are different times, but Oldham is a contender. A place for some to start is perhaps Johnny Cash's spellbinding cover of Oldham's ‘I See A Darkness', on the album Solitary Man (2000), produced by Rick Rubin. For those already au fait with Oldham's output, though, the news is that he's made yet another good record.