She also used the Keith Joseph Memorial Lecture to mount a ferocious assault on Brussels that "our laws, our parliament, our freedom" were in peril.
"The Conservative Party has problems not because our analysis has been wrong or our principles faulty. Our difficulties are due to the fact that, in certain limited but important respects, our policies and performance have not lived up to our analysis and principles," she said.
"That is why the current idea, put around by some malcontents, that the Conservative Party is in trouble because it has moved to the right - and that this is what needs to be remedied - is baloney.
"The test is simple. Just ask yourself: is it because the Government has not spent, borrowed and taxed enough that people are discontented? Or is it because we have gone too far towards increasing Government spending, borrowing and taxation?
"The answer is obvious. We are unpopular above all because the middle classes - and all those who aspire to join the middle classes - feel that they no longer have the incentives and opportunities they expect from a Conservative Government.
"I am not sure what is meant by those who say that the party should return to something called One Nation Conservatism. As far as I can tell by their views on European federalism, such people's creed would better be described as No Nation Conservatism.
"And certainly anyone who believes that salvation is to be found further away from the basic Conservative principles which prevailed in the 1980s - small government, a property-owning democracy, tax cuts, deregulation and national sovereignty - is profoundly mistaken."
Despite praising John Major for sharing her "broad analysis", she appeared to cast serious doubt on his insistence that the Tories under his leadership were a party of the centre-right.
For the first time, Lady Thatcher admitted to making "mistakes" in the late 1980s, when inflation took off as the economy overheated, but said the principles remained good.
"It would make no economic sense at all for us to move closer to the policies of our opponents. Rather, the economic challenge is to cut back the burden of state spending, borrowing and taxation still further," she said.
"Trying to move towards the centre ground makes no political sense either. It is not the centre but the common ground, the shared instincts and traditions of the British people, on which we should pitch our tents.
"That ground is solid, whereas the centre ground is as slippery as the spin doctors who have colonised it."
Lady Thatcher said it was no secret there had been difference "on occasion" between her and the Prime Minister, but they were limited to how objectives should be reached and not the nature of the objectives themselves.
"What is required now is that those objectives are clearly explained, so that a re- elected Conservative Government can go further toward fulfilling them. The attractions of Opposition are greatly exaggerated by those who have not experienced it," she said.
She said limiting the size of government remained "the great issue of British politics" but also called for strides in cutting spending and borrowing.
Chancellor Kenneth Clarke's commitment to reduce the proportion of public spending as a share of national income to below 40 per cent was welcome but needed eventually to be brought down "much more".
Lady Thatcher went on to praise the steady progress made by the Secretary of State for Social Security, Peter Lilley, in cutting the welfare bill, the "courageous and far-reaching reforms" of Home Secretary Michael Howard and the claim by failed right-wing leadership challenger John Redwood that a European single currency was the first step to a united Europe.
And she further offered deliberate backing to Defence Secretary Michael Portillo - the hate figure of the Tory left - for his controversial party conference speech in which he "roundly and rightly attacked" proposals for a common EU defence policy.
She warned that the European Court was undermining both parliament and the judicial system, the EU defence proposals were a threat to national sovereignty and that a single currency would lead to a single nation.
Lady Thatcher added pointedly: "The Prime Minister will have the support of all of us who wish to see these dangerous and damaging proposals resisted and the present trends reversed as he argues Britain's case at the forthcoming Inter-Governmental Conference. And we look forward to a successful outcome."
"The European Union not only wishes to take away our powers, it wishes to increase its own," she said.
"It wants to regulate our industries and labour markets, pontificate over our tastes, in short, to determine our lives.
"The Maastricht Treaty, which established a common European citizenship and greatly expanded the remit of the European Commission, shows the outlines of the bureaucratic superstate which is envisaged. Maastricht is the beginning, not the end, of that process.
"Self-government, limited government, our laws, our parliament, our freedom. These things were not easily won. And if we Conservatives explain that they are now in peril, they will not be lightly surrendered."
She added: "Judging from the opinion polls, Opposition is where the electorate is at present inclined to send us. For a variety of reasons ... I believe that this would be ill-judged on their part.
"The Conservative Party still has much to offer. And from Mr Blair's New - or not so new - Labour Party there is much to fear. But we must not ignore the present discontent."
Leading article, page 14Reuse content