In the battle between the lion and the Scottish ogre, there was only ever going to be one winner: the green beast just had that extra dimension. Last week Shrek 2, in all its three dimensional (3D) computer-generated glory, became the highest-grossing animated film of all time, knocking The Lion King from its throne. But in deposing Disney's Hamlet-in-furs, Shrek 2 may also have finally destroyed one of animation's most beloved and recently most embattled bastions – traditional two dimension (2D) animation. The figures don't lie. The animated graveyard is littered with recently failed 2D features. Anyone remember Titan AE, The Quest For Camelot, The Road To El Dorado, or Treasure Planet? Probably not. Even if you do, it is probably because your kid's Happy Meal was entombed beneath its branding. Combined, their budgets totalled $403 million, yet they made just $166m between them.

In contrast, Shrek 2's record-breaking run speaks for itself. As well as becoming the highest-grossing animated film of all time, it took $104.3m in its first weekend, earning it the accolade of best-ever opening weekend for an animated movie; it also recorded the largest five-day opening for any film.

It is emblematic of computer generated imagery (CGI) animation's success in recent years. While 2D features were floundering, their computer generated cousins flexed their immaculately rendered muscles. Combined, Ice Age, both Toy Story films, Monsters, Inc, Antz and A Bug's Life cost $400m. Their total box office income was a staggering $1.8 billion.

For all its excitement and glamour, showbusiness is still a business, and the bottom line is an unforgiving yardstick. So last year all major Hollywood studios laid down their pencils and ink and stopped production of traditional 2D animated features. Even Disney. The 2D dregs commissioned before the cull will appear over the next few years (Disney's Home On The Range, Universal's Curious George), but in Hollywood CGI is regarded as the only way to animate from now on. All of which has left a lot of animators very angry.

"There are a lot of frustrated people here," says Bill Desowitz, editor of Animation World Network, the world's largest animation publication, based on Sunset Boulevard, Hollywood. "There is a feeling that 2D is seen in the same way black-and-white was viewed: aesthetically it has become antiquated. So there is a certain dynamic aspect, a freshness to CGI. And the pre-teen and teenage audience that might be turned off by traditional animation finds 3D more hip."

And according to one of the world's leading animators, it is Disney, the company that created the art of 2D animated features, which is responsible for "bringing it to the grave".

"They don't know how to do 2D animated films any more. They have bored people. They are really losing everything," says Sylvain Chomet, the talent behind last year's animated hit, Belleville Rendezvous. "It is not because of the artist. It is because of the production people who want to do their films in a certain way. They want to use recipes and they always want to get these old stories that have already been done 100 times. There is no originality, and people are craving for originality."

As a case in point, Disney's 2D intergalactic reheating of Robert Louis Stevenson's Treasure Island, Treasure Planet, cost $140m but only made $40m at the 2002 box office, while average fare such as Brother Bear, The Emperor's New Groove, and Atlantis: The Lost Empire all just about broke even. It is only Disney's CGI-animated Pixar collaborations (Toy Story, Finding Nemo) that have reproduced the stellar commercial and cultural impact of their earlier works like The Lion King, The Jungle Book, and Snow White And The Seven Dwarves.

"The people in 3D were a bit more original and creative than the people in 2D," explains Chomet. "For example, people from Pixar were much more artistically challenging than people from Disney these last years."

Yet Disney failed to renew its deal with Pixar and the computer animation company is taking its lucrative business elsewhere, leaving the company behind the world's best loved cartoon character, Mickey Mouse, with little presence in the new-look animation industry.

With the mighty Hollywood turning its back on 2D, is this the end for traditional animated features? Far from it, according to many animation insiders. In fact, they would argue, instead of going to the great multiplex in the sky, 2D has just gone to the arthouse.

"I don't think that when something is very, very successful, it means the death of something else," says Jon Doyle, a senior producer and director at Cosgrove Hall, Europe's largest animation studio. "Last year we had Belleville Rendezvous, which broke everyone's expectations, and Spirited Away (a Manga-type Japanese animation), which nobody saw coming from left of field. Then suddenly they were up there with the Oscars and everyone was talking about them – and they weren't Disney or one of the big players. That's when the industry is interesting. I hate to think there won't be some animation revolutions to come, that this is going to be the end of 2D ."

"It's not going to die," says Chomet. "Radio didn't die because of the TV. You still see black-and-white movies, you can still see silent movies." Fresh from the success of his Oscar and Bafta-nominated Belleville Rendezvous, Chomet relocated to Edinburgh earlier this year to set up an animation studio, Studio Django. It will produce both 2D and 3D films. The French-born animator also believes 2D's future is secure in arthouse cinema.

"There are people doing 2D animated films with very small teams and budgets, but with a lot of originality, and they are beautiful films," he says. In short, 2D still has the power to beguile. Chomet adds that "sensuality is better hand-drawn, it is more poetic", while 3D is more "plastic and synthetic".

What's more, Doyle argues, you can get too much 3D. "When you've been watching at lot of CGI films, as I have, sometimes it's very refreshing to look at something that's very graphic and 2D and flat that still tells a story," he says.

And for the kids watching these animated features, Chomet says, it is still the cartoons etched on paper rather than computer screen that really engage. "In 2D animation it is about the relation with the drawing, and kids spend their days drawing. So for them it really is more magical to see a drawing that's moving than CGI."

But, according to Steve Flack, head of Duncan of Jordanstone's School of TV and Imaging in Dundee, home to one of the UK's finest animation courses, it is Shrek rather than Spirited Away that most of his graduates want to emulate.

"In animation you will get one, maybe two students who are happy to sell their souls to just end up making the odd movie that tells a message," he says. "But most of them want to work for the big companies."

Despite this, Flack says at Duncan of Jordanstone students have to learn a "strong 2D understanding and the ability to draw, otherwise you are really not in a very strong position in this business".

Chomet agrees that there is room for both types of animation in the industry. "For a long time 2D and 3D have been compatible and working together in harmony," says Chomet. Belleville Rendezvous featured 45 minutes of CGI after all, which was rendered to look 2D. "I think the only people who are trying to put 3D against 2D are the producers, people who don't know how to do films."