Writing before Christmas in the Sheffield Telegraph, the former Home Secretary asked: "How is it that a city of half a million people, with at least one corner being the second wealthiest in the North of England, still struggles to have a decent, reliable and consistent restaurant?"

His criticism was aimed not so much at food as at service: "There seems to be no understanding in many restaurants in Sheffield about the nature of glasses used for white and red wine… or a basic understanding by the proprietors that wine not only comes from different parts of the world, but different vintages! The habit, in some restaurants, of uncorking the bottle 'round the back' simply will not do."

The floodgates of readers' sarcasm were opened. "David Blunkett shows he truly has his finger on the pulse of Sheffield," wrote Paul Adam. "In the midst of rising gun crime, social breakdown and an ever-widening gap between rich and poor, David has had the perception to highlight the key issue facing the city – the shortage of decent wine waiters."

Phil Sadler pointed out that, like Blunkett, he too had been brought up on a council estate. "But I can't, for the life of me, remember me mam telling me the rules of different glasses for different wines. Maybe I was deprived. Tell me, David, which glass did tha use for thi Tizer? Thi Jusoda? Or thi Dandelion and Burdock?"

For some, this storm in a wine glass highlighted the disparity between Blunkett's own working-class Sheffield constituency (Brightside) and the city's efforts over the past decade to regenerate and transform its post-industrial self into "Leeds Lite"… which gives an interesting slant to a visit to The Milestone.

Straddling the great divide between Old and New Sheffield, this bar and restaurant occupies the former Ball Inn, an 1830s steelworkers' local in the Kelham Island area, once a centre of cutlery and silverware production.

Just along the road were some of the city's worst Victorian slums. In the 1850s, 473 people lived in 109 households, mostly back-to-backs, in an area half the size of a football pitch. With just 18 water taps or pumps between them, they shared the site with a foundry, a brewery and two pubs. The slums are long-gone and, for much of the 1980s, it looked as though the factories and workshops around them would follow suit.

Then someone invented "apartments" for smart young urban professionals and Kelham suddenly got a new lease of life (perhaps with 473 people living in an area a quarter the size of a football pitch).

Factory after factory has been converted, most spectacularly at Cornish Place, the former James Dixon's silver-plate works, with its great riverside cliff-face of windows and The Ball-turned-Milestone slotted into a neat corner. Set up by Matt Bigland and Miles Gould, former managers of a local All Bar One, it must be a godsend to the people who now live there: a welcoming, cosmopolitan gastro-pub with an interesting, expertly executed menu.

We arrive in the rain, comprehensively soaked after a nostalgic wander around Kelham's Dickensian back streets. The downstairs bar, with a dozen or so customers getting quietly on with their evenings, is warm and cosy with candles, and a waitress brings towels for us to dry ourselves. The bar's "gastro" menu – tapas, pizza, fish pie, game pudding – looks appealing enough, but we've booked a table in the upstairs dining room, with its separate menu, more gourmet than gastro. Unfortunately, on a wet night early in the week, we're the only booking and the upstairs menu doesn't operate downstairs. What to do? Conscious of our Blunkettesque duty to explore the wine service in depth, we settle on upstairs.

It's an attractively minimalist room, chic with stripped floorboards, exposed beams, and a wall-sized Victorian photograph of Kelham in more smoggy, flat-cap-wearing days. Even with just Frank Sinatra CDs for company, it has atmosphere.

There are a couple of curiosities here – the open kitchen at the top of the stairs, and no blinds or curtains – but we settle back with Frank and gaze across the Cornish Place courtyard at apartment life. It's real Rear Window stuff: a woman strolls round her living-room with a glass of wine, a young man jogs in with a takeaway and switches on his plasma screen, another juggles mobile phone, key and big framed print as he struggles to let himself in. "I've got you under my skin", croons Frank.

A key factor in our evening is our waitress, Jessica. An architecture student, she is prompt with her service, delightfully chatty and remarkably patient with a couple of old hacks rabbiting on about buffing wheels and scissor grinders. But I suppose, even at this late stage, you want to hear about the food. The menu runs to five each of starters, mains and desserts; generous portions, beautifully presented.

For starters (both £8.95), the mushroom soup with chestnuts, parsnip and frothy crème fraîche is rich, tangy and thick enough for a casserole. Beetroot and artichoke tatin is dense with flavour, though a tad rash with the balsamic.

For mains (£10), there's firm-textured cannelloni filled with creamy smoked cheese and basil, and a sea bass fillet given an intense edge by capers (why don't more chefs use them?). Good "al dente" broccoli and green beans are offset by a wonderfully light carrot and swede purée. Complimentary breads, an amuse-bouche or two and pre-desserts; cappuccino, £2.50. Soft and fruity house Merlot at £11.50.

It's a marvellous meal, but it provokes conflicting feelings: sadness that the industry that once defined the North and gave all these buildings a real purpose is now mostly gone; relief that this small corner has been rescued and put to such imaginative use.

The wine, incidentally, was properly uncorked at the table and expertly poured into the right glasses.

The Milestone Bar & Restaurant, 84 Green Lane (corner of Ball Street), Sheffield S3 8SE, 0114 272 8327; www.the-milestone.co.uk. Monday to Saturday 11am to 11pm; Sunday 11am to 10.30pm. Food served downstairs noon to 10pm daily. Upstairs dining room serves food 5.30pm to 10, Tuesday to Saturday.