We present two-dimensional fibre spectroscopy of the spectacular extended emission-line region surrounding the z = 0.734 radio-loud quasar 3C254, and archival ROSAT PSPC data of this source. We confirm that the emission-line nebula is extended over at least 80 kpc, and its morphology is strongly correlated with the radio source structure. The kinematics and intensity of the emission lines similar to 15 kpc (1.5 arcsec) east of the quasar core strongly indicate an interaction of a radio jet with a dense cloud. Evidence for a high-pressure confining medium comes from the low ionization state of the nebula, given the proximity of the luminous quasar. Over 70 per cent of the total [O II] lambda 3727 luminosity is emitted from the extended emission-line region, but the majority of the [O III] lambda 5007-line luminosity is from the nucleus. No major ionization change is seen in the nebula at the position of the jet-cloud interaction, but a small region similar to 1.4 arcsec west of the quasar nucleus shows a markedly higher ionization state. The X-ray spectrum is well-fitted by a power-law with energy index Gamma similar to 2.3, without any excess absorption, and a thermal cluster contribution to the spectrum is also allowed. The emission-line nebula associated with 3C254 shares many of the orientation-independent characteristics of powerful radio galaxies at similar, and higher, redshifts, and strongly supports models seeking to unify the two through orientation to the observer.