Ministers came under fire from the Tory opposition after making clear they were likely to reject the call last week by Lord Neill's Committee on Standards in Public Life for the Government to remain neutral in referendums.
But Mr Heseltine told The Independent: "It cannot remain neutral. If the Government is neutral, there won't be a referendum, so it cannot be neutral. It is quite inconceivable that there will be a referendum in which the Government is neutral," he said.
Mr Heseltine's intervention will anger the Tory leadership, which believes Lord Neill's proposal for a "level playing field" in referendums would make it much harder for Tony Blair to win public backing for the euro.
Yesterday, Peter Mandelson, Secretary of State for Trade and Industry, said the Government might not accept the Neill report in full, adding that it would have been "ridiculous" if ministers had not spoken up for their policy in last year's referendums on Scottish and Welsh devolution. Michael Howard, the shadow Foreign Secretary, replied that Mr Mandelson's comments were a matter of "deep concern" and showed the Government wanted to fight the referendums with "loaded dice".
Mr Heseltine is sticking to his guns on Europe, despite rumblings of discontent in his Henley constituency, where some Tory activists want him to stand down at the next general election unless he stops criticising Tory policy on the single currency. He insists his future is a matter between him and his constituency association.
Mr Heseltine believes that William Hague, the Tory leader, is wrong to rule out single currency membership in this Parliament and the next, and is convinced the party should have stuck to its "wait and see" policy.
However, he was also critical of Tony Blair, saying he should be giving the country a lead on Europe. "We have got a vacuum of leadership on this issue. The Prime Minister cannot make up his mind for the worst of all possible reasons - he is obsessed with day-to-day, thermometer-in-the- throat public opinion. It's a sort of politics, but it's not leadership."
Mr Heseltine was speaking at home shortly before leaving for a two-week break in Turkey, after playing a starring role on the fringe at one of the most disastrous Tory party conferences for a generation.
He does not accept that the ballot of 300,000 people, which went in favour of Mr Hague's European policy, was a true reflection of the millions who supported the Tories at the last election. The danger, he believes, is that the Tory party is being taken over by the activists, just as Labour was in the 1980s. The Tories would not regain power until they won back the support of those voters who deserted them last year.
"It's a judgement that too many people in the Conservative Party today have lost sight of. They think that winning the [support of the] activists is about winning power. It's not. It's about reinforcing the prejudices of the people who lost [the general election]."
What does he think of Mr Hague's leadership? "William Hague is extremely able. He is the best public orator to lead the Tory party since Churchill and I got on extremely well with him in government. I just think he's made a misjudgement over Europe."
The ballot had a wholly predictable consequence, he said. It elevated the issue on which the Conservatives were most vulnerable until it dominated the party conference.
But what of the Eurosceptics and even the leadership, who blamed Mr Heseltine for highlighting the issue by whipping it up on the fringe? "They say that, but these are the people who made John Major's life impossible. The Eurosceptics in the Tory party made John Major's life a hell and 160 signed manifestos incompatible with party policy despite every effort that could be made to persuade them to remain loyal to John Major's policy. The word loyalty doesn't lie in the mouths of these people ...
"It's quite apparent to me that Michael Portillo has staked his claim to the 'Britain Out' campaign. William Cash has articulated that posture and they have differentiated their position from that under William Hague ...
"I have no doubt at all when Michael Portillo comes back to the House of Commons, the North American press - [Conrad] Black [owner of The Daily Telegraph] and [Rupert] Murdoch [owner of The Times and The Sun] will switch their allegiance to getting him made leader of the Tory party.
"There is no doubt that will be the agenda. This is the Thatcherite inheritance and William Hague will need all the support he can muster to sustain his position. It's all as clear as crystal to me."