It does strike a bizarre balance between realism and surrealism. For example, the scenes in the first half of the pilot, detailing the granular, "small" effects of Laura's death are all ultra-realistic. If this were a tiny town, this is about exactly how things would happen, how the town "scandal" would unfold, the school cancellation, the many, many awkward moments. People that have dealt with death know that the reactions of Laura's parents are, at least in the pilot, very realistic. The chick that plays Laura's mom is absolutely brilliant, and she should have gotten every acting award in the book based on her performance in the first episode. She plays a 100% realistic hysterical mother whose daughter has just been murdered. The performance of Laura's dad, Leland, is also very convincing. Very masculine in that he is just as emotional as the mother, but he feels the need to try to repress the emotion, be the strong one. Naturally, he fails at this, and the emotion bleeds through in ridiculous ways that are at the same time both very realistic, and surreal.
In a way, that's what the series, at least the first season, tries to explore. Surreality can just be a natural consequence of reality taken to very rational extremes. Real life devolves into a cheesy soap opera for someone everywhere, every single day, of every year. What Twin Peaks does, in its first season, is explore the line where reality and surreality meet. Maybe it fails, even in the brilliant first season, of maintaining that illusion, but it at least manages to maintain it for a significant portion of the time.
I can't fucking believe anyone ever okayed this show. It's so fucking brilliant.

Lynch