Delighted actors, musicians and artists at the South Bank Show Awards gave Sir Peter a standing ovation for his lengthy diatribe. But afterwards Mr Smith acknowledged the pain caused by the Arts Council's pounds 1.5m budget cut and hinted that the Government hoped to do better next year.
Sir Peter's attack "on the ridiculous situation" came as he accepted the final award for outstanding achievement at the star-packed lunch at the Savoy hotel, London.
He said successive cuts under the previous Conservative government had made arts companies more and more miserable.
"That went on for 20 years under a Conservative government that didn't have the guts to say, 'We don't believe in subsidies.' Come the dawn last year, what's happened? A cut in the Arts Council grant.
"It saves tuppence. It's going to ruin a number of small theatres and dance companies. What's the point, Minister?"
With Mr Smith just a few feet away, Sir Peter harangued: "Is it just that you are reassuring Tory voters that you are not soft on the arts? It won't do.
"I am a Labour man, but I am a very worried Labour man. The talent that has been celebrated here today is worth keeping. Couldn't we say to ourselves, 'Do we want that? Are we proud of it? If we do, can we stop them suffering?' Sorry to be passionate, but I think the situation is ridiculous."
With whistles and cheers, the Savoy audience leapt to its feet - all except Mr Smith's table. But the Arts Council chairman-elect, Gerry Robinson, sitting next to Mr Smith, was grinning broadly.
The soprano Lesley Garrett, presenting a prize for opera, attacked Mr Smith's "completely outrageous suggestion" that the English National Opera, for which she sings, should be moved from its Coliseum home into the refurbished Covent Garden alongside the equally cash-strapped Royal Opera and Royal Ballet.
Afterwards Mr Smith said the speech was "wonderfully passionate".
"I am acutely aware of the financial story which many arts organisations and companies are facing in the coming year. I am aware that the budget for the arts has been squeezed successively for quite a few years."
The Government could not do everything it wanted to straight away, he said.
Other winners at the awards were the author Ian McEwan, the film director Anthony Minghella for The English Patient, and the actors Hugo Speer and William Snape, who is aged 11, for the best comedy, The Full Monty.Reuse content