We have designed and tested a new relativistic Lagrangian hydrodynamics code, which treats gravity in the conformally flat approximation to general relativity. We have tested the resulting code extensively, finding that it performs well for calculations of equilibrium single-star models, collapsing relativistic dust clouds, and quasi-circular orbits of equilibrium solutions. By adding a radiation reaction treatment, we compute the full evolution of a coalescing binary neutron star system. We find that the amount of mass ejected from the system, much less than a per cent, is greatly reduced by the inclusion of relativistic gravitation. The gravity wave energy spectrum shows a clear divergence away from the Newtonian point-mass form, consistent with the form derived from relativistic quasi-equilibrium fluid sequences.