March 31, 2003 12:00 PM

Neither Elvis Costello nor Diana Krall picked up a Grammy at last I year’s awards ceremony in L.A., but both of the musicians went home big winners. They were presenting Song of the Year together, and Krall was feeling somewhat new to the game. “He was so kind in helping me over my nervousness,” Krall told VH-1. “He said, ‘I met you four years ago at the Grammys, and I said you should check out this tune of mine.’ I had to tell him that I hadn’t checked it out—and hadn’t really checked him out. He seemed to appreciate that, and we clicked. I think he’s the coolest guy. I bought all of his albums the next day.”

She must have liked what she heard. By the end of 2002, Krall and Costello were stepping out together, and at this year’s Grammys (where she won best jazz-vocal album), Krall, 38, and Costello, 47, arrived arm in arm. They were together again at a London benefit last month, performing a steamy duet of Elton John’s, “Sorry Seems to be the Hardest Word.” Then they appeared at a March 10 gala in New York City, where Krall turned heads in a low-cut brown jacket and Gucci miniskirt, and where Costello and his band the Attractions were inducted into the Rock and Roll Hall of Fame. At the ceremony Krall said that their relationship “has been great, and I’m very happy.”

Indeed, both singers seem to be putting heartache behind them. London-born Costello, who was divorced from his first wife, Mary, in 1985 (they have a son, Matthew), split from his wife of 16 years, former Pogues bassist Cait O’Riordan, in September. And last year Krall, who grew up in Nanaimo, a town in Canada’s British Columbia, broke up with her boyfriend of two years, screenwriter John-Paul Bernbach. She also suffered, in quick succession, the loss of her mother and two of her closest mentors. Adella Krall, an elementary school teacher, died of multiple myeloma, a rare form of bone marrow cancer, at age 60 last May. “She was a very special person,” Krall told Britain’s Sunday Telegraph. “Then I lost [singer] Rosemary Clooney a month later, who was a very strong maternal figure to me. Then I lost Ray Brown [the musician husband of Ella Fitzgerald] four days after that, who was a paternal figure to me. Both of those people had consoled me when my mom died.”

Krall, who now lives in Manhattan’s Greenwich Village and hangs out with Costello in New York City and Ireland, remains close to her father, Jim, 65, an accountant, and her sister Michelle, a former police officer. “I have clients with major record labels whose mothers have never been to a show,” says her longtime friend and lawyer Josh Grier. “Diana included her parents significantly. If Diana were leaving [the theater after] an appearance on David Letterman, the first thing she would do in the car would be to call her folks.”

Professionally, Krall and Costello are an odd couple. “She has a limited knowledge of rock music,” says Grier of the sultry jazz singer. “She couldn’t tell you who Ian Dury and the Blockheads were.” But they seem to be ironing out their differences nicely. They’ve been spotted shopping for records together in Krall’s hometown: “I don’t think Elvis would have been here just to visit my record store,” says Steve Lebitschnig, who owns the Fascinating Rhythm store. “They were definitely an item.” During a Grammy party for nominees from Canada at the home of Canadian Consul General Pamela Wallin on Park Avenue, “they were physically very close,” Wallin says. “They held hands. They are very supportive in conversation with one another. When one person is more famous, they tend to be the belle of the ball, but this is a really nice balance. I don’t think he left her side, even to get her drinks. Lucky there were waiters.”

With Costello at her side, Krall is also embarking on new musical endeavors. On vacations, Grier says, “they get to a place where there is a piano and a guitar, and they goof around.” And though Krall hasn’t written any of the songs on her albums, “he is showing her that she can be a songwriter,” says Grier. “The audience has wanted her to be knocking out these standards, so it has been hard to pick the moment.” Now if only she can find time to make her real life as sensuous as her songs. “She makes all these records that everyone else makes out to,” Grier says, “and she is on a plane somewhere trying to get to the next show.”

Kyle Smith

Rebecca Paley and Rachel Felder in New York City, Barbara McLintock in Nanaimo and York Membery in London