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Liberating central London's historic squares from their oppression by cars has been a gleam in the eye of Lords Rogers and Foster, among others, for more than a decade. The first square to achieve this distinction is the Inland Revenue enclave of Somerset House, between the Strand and the Thames embankment, which opens this week as London's newest and arguably grandest public space and open-air concert venue.

For most of the last century, civil servants' cars have blinded visitors' eyes to the splendour of the spacious central courtyard, which is surrounded on four sides by Sir William Chambers' grand Palladian civic palace completed in 1801. Now the cars have been banished for good, and the tarmac has been replaced by granite setts with a network of fountain jets concealed below them.

The courtyard is not the only new public attraction Somerset House has to show for its £48m of investment, including £13m from the Heritage Lottery Fund. The flat roof over the lower south block facing the embankment has been converted to a public terrace with a breathtaking panorama over the river. The terrace is adorned with sculptures and is served by a new café and restaurant run by Irish restaurateur Oliver Peyton. It is linked by a short sliver of a footbridge in glass and steel to the approach to Waterloo Bridge, which passes with superb serendipity at the same level just a few feet away from one end of the terrace.

Next to the café, other grand rooms in the south wing are being converted to two more galleries: a permanent outpost for the world-famous State Hermitage Museum in St Petersburg and, above that, an extension to the Courtauld Institute Gallery, which already occupies the north wing.

Perhaps most spectacular of all, the entire embankment block below the river terrace, along with the basement of the neighbouring block, has been converted to an even larger and brand-new art gallery. The Gilbert Collection is a total revelation to Londoners. It comprises 800 items of silver, gold, Italian stone marquetry and a little-know art form called micromosaics. These look like oil paintings, but on closer inspection turn out to be composed of marbles and precious stones.

The Gilbert Collection, worth £100m, was donated to the nation by Arthur Gilbert, a London boy who made it big in property in Los Angeles. Gilbert's donation acted as catalyst for the other improvements at Somerset House, and he was justifiably awarded a knighthood for his generosity.

Four architects have been involved in the cluster of refurbishment projects at Somerset House. Peter Inskip & Peter Jenkins converted the south wing to house the Gilbert Collection, the building fabric was revamped by Feilden & Mawson, the central courtyard is the work of Donald Insall Associates and the river terrace was designed by Jeremy Dixon.Edward Jones.

For the Gilbert Collection, Peter Inskip & Peter Jenkins has taken the opposite approach to Mather at the Dulwich Picture Gallery: they have shut out daylight completely. Instead, tungsten halogen spotlights focus on the exquisitely minuscule exhibits, producing a literally brilliant effect against subdued background lighting. The secret ingredient in the exhibition design is a state-of-the-art electronic security system, which allows many of the priceless exhibits to be fully exposed to view, enveloped only by an invisible magnetic field connected to alarms.

The wing fronting the embankment was originally built at the water's edge, and after languishing for more than a century as a goods entrance, Chambers' original water gate has been salvaged as a grand public entrance below a wide stone arch. Although still lacking Thames water, a glass floor reveals a recreated pebbled beach below, and as a bonus, a historic royal barge has been moored where it would have delivered its royal passengers.

In the courtyard, Donald Insall Associates has concealed all the new goodies beneath the reinstated paving of granite setts. A few loosely laid setts can be removed to expose 48 submerged fountain jets. Likewise, an outer ring of granite slabs conceals a ring of powerful spotlights and cabling, and a new undercroft has been built to contain plant and changing rooms. With these services on tap, the 3700 m2 courtyard can serve as an outdoor café and seating area, a square with performing fountains, or a fully equipped outdoor concert venue with a capacity of 3500.

As well as three world-class art galleries, a reclaimed courtyard and a new river terrace, Somerset House now also provides an inspirational pedestrian short-cut from the Strand to Waterloo Bridge. As in the best urban design projects, the refurbishment of Somerset House is greater than the sum of its considerable parts.