With just over a week to go before the Oscar hopefuls walk up the red carpet to Hollywood's Kodak Theater, a small, intense Iraq War drama looks like the film to beat in the best picture category. The Hurt Locker, which picked up six Baftas last Sunday including best film, has stolen the lead from the formerly favoured Avatar.

Make believe: Avatar would be the highest grossing Oscar winner in history

Although it's not a done deal — and the Oscars always deliver a surprise or two — Avatar looks as though it will only win the technical awards when the great and good of the film world assemble to hear how the Academy of Motion Picture Arts & Sciences members have voted on 7 March.

That might cause some problems with perception at the Academy, which has gone to great lengths this year to make its TV broadcast as mainstream and populist as possible. On the one hand, the mere presence of Avatar in the nominations list will probably push up ratings from eager fans of the blue-faced blockbuster. After all, the Oscar broadcasts with the highest ratings in recent years were in 1998 and 2004, when box-office behemoths Titanic and The Return of the King were the respective big winners.

War of the worlds: The Hurt Locker would be the lowest grossing Oscar winner in history

But dedicated Avatar fans cannot be guaranteed the same board-sweeping big win, and a defeat could prompt an outcry from mainstream cinema-goers which will have long-term ramifications for the Oscars.

If The Hurt Locker takes best picture, it will be the lowest-grossing winner in Academy history. Its tiny $12.7 million US box-office gross means that between one and two million people went to see it in a cinema in North America. Compare that with Avatar, which is closing in on $700 million — a number that translates to about 100 million admissions in the US alone — and the contrast is clear.

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In fact it was the dominance in last year's Oscar line-ups of small, little-seen movies such as Milk, The Reader, Doubt and Frost/Nixon and the omission of megahit The Dark Knight that had fans fuming and prompted the Academy to expand its best film category to 10 nominees this year. The thinking was that a longer shortlist would give critically acclaimed crowd-pleasers such as The Dark Knight a better shot at a nomination from the generally highbrow Academy voters (more than 5,000 film industry professionals, with the largest single group being actors).

The strategy seems to have paid off this year, with more blockbuster films up for the top prize than ever, including Avatar, District 9 and The Blind Side, although Star Trek and The Hangover didn't make the cut.

So why has the tide turned against Avatar as the favourite to win? After all, the reviews were generally very strong, the film is a ground-breaker in both its technology and box-office receipts, and in January it took both best film and director prizes at the Golden Globes, one of the key Oscar indicators.

The problem with Avatar is that it is science fiction, a highly unfashionable genre with Academy voters who have always tended to go for true-life stories dealing with issues like the Holocaust, mental illness or racial integration. The Lord of the Rings trilogy ultimately escaped the sci-fi curse, since it was an epic fantasy that took place on Earth (albeit Middle Earth).

Outer space and aliens just aren't Oscar material. Although nominated for best film in 1977, Star Wars lost to Annie Hall. ET lost to Gandhi in 1982. Even real-life space operas The Right Stuff (1983) and Apollo 13 (1995) stumbled at the final hurdle.

The Hurt Locker, on the other hand, has all the hallmarks of a respectable Oscar winner. It's a nerve-shredding drama which takes an important subject like the Iraq War and tells a non-political story about a man addicted to war against its backdrop. Winners can wax lyrical on stage about how peace should be achieved and how brave US servicemen and women are. Everybody will feel happy and pious. That's not to mention the fact that, should she win in the directing category, Kathryn Bigelow would be the first woman to do so. Another self-congratulatory pat on the back for Academy voters.

Bigelow's ex-husband, James Cameron, might not be such a respectable presence on stage, however. Who can forget his much-lampooned “I'm the king of the world” declaration on winning for Titanic in 1998? And at the Golden Globes, he started rambling in Na'vi, the alien language he created for Avatar. It was an excruciating moment and one which could well have turned Academy voters off right there.

It's not necessarily a two-horse race, of course. Harvey Weinstein is convinced he has a shot with Inglourious Basterds, from Quentin Tarantino, who has earned his first Oscar nods in 15 years for the Second World War romp. Weinstein believes that voters tired of the face-off between Cameron and Bigelow might turn to a third option and that could be Basterds. Nor should Up in the Air or Precious be discounted. Both are “quality” and “serious”, adjectives frequently uttered by the LA film crowd when talking about their awards movies.

The Hurt Locker's ascendancy, meanwhile, has been slow but sure. Its world premiere at the Venice Film Festival was back in August 2008 and the critical response, while positive, was certainly not ecstatic.

It finally opened in US cinemas in June last year, to a stronger response from critics. But by the end of the year, that had turned to adulation as other big hopefuls such as The Lovely Bones, The Road and Nine fell by the wayside. One after the other, like sheep, America's critics declared that The Hurt Locker was the year's best film, when perhaps what they were really declaring was that it was the year's most presentable and earnest.

The movie establishment might be shooting itself in the foot, however, if it denies the biggest film in Hollywood history, Avatar, at the Oscars and celebrates The Hurt Locker, one of its smallest and the latest in a fearsomely unpopular series of Iraq War movies. It could be a betrayal of the ticket-buying audience by the industry that won't be forgotten.

Mike Goodridge is editor of Screen International. The Oscars, co-hosted by Steve Martin and Alec Baldwin, can be seen live on Sky Movies Premiere from 1am (GMT) on Monday 8 March.