Mr Lilley sparked the crisis over making a clean break with the Thatcher era by declaring last week that the free market had only a limited role to play in improving public services.
Although William Hague has publicly defended Mr Lilley, close allies of the beleaguered Tory leader distanced him from his deputy's controversial speech. "He [Mr Lilley] is an honourable man; I am sure he is wondering about his position," a senior source told The Independent.
Tory officials denied that Mr Lilley would resign, saying this would only prolong the party's crisis. But Mr Hague is expected to sack him when he carries reshuffles the Shadow Cabinet in June or July.
Mr Lilley has remained silent - even during private meetings at Conservative Central Office - about why he authorised Tory spin-doctors to issue an aggressive advance billing of the Rab Butler Memorial Lecture he was to make on Tuesday last week.
But the reasons are beginning to emerge. On the previous Friday, Mr Lilley realised belatedly that his engagement clashed with a much bigger event - a dinner, to be addressed by Mr Hague, to mark the 20th anniversary of Margaret Thatcher's election as Prime Minister.
Fearing that his own speech would get no media coverage, he told Tory spin-doctors to trail it in Monday's newspapers as an important U-turn. But Mr Lilley failed to anticipate the furious reaction inside the party to his apparent ditching of Thatcherism.
"He wanted to deliver a 10,000-volt shock and he certainly succeeded," a Tory insider said last.
"The message - that we could be trusted on public services - was fine. But the way he chose to deliver it, by rejecting Thatcherism, alienated virtually everybody in the party."
Mr Lilley watered down his speech slightly after hasty consultations with shadow cabinet colleagues, most of whom were furious to learn about it from Monday's newspapers. But the key message remained the same. "He had put us on a rollercoaster and there was no jumping off," said one Tory official.
Mr Hague was privately appalled by the words crafted by his deputy. But, at a crucial meeting with his inner circle on Monday last week, decided to back him rather than disown him.
It was the seminal moment in the crisis, and Mr Hague's judgement is now being openly questioned. "With hindsight, it would have been better to dump on Lilley; then the affair would have been a 24-hour wonder rather than a 10-day disaster," said a Tory frontbencher. The Tory leader tried to square the circle, insisting that rejecting a free-market approach to health, education and welfare would still allow state funding to be topped up by greater private provision.
But he failed to quell the growing rebellion among Tory MPs, partly because his public endorsement of Mr Lilley - at the dinner in honour of Baroness Thatcher - appeared a deliberate snub to the party's idol. "The timing was a cock-up rather than a conspiracy but it made the crisis much worse," a Hague ally admitted last night.
The anger in the party broke surface at last week's meetings of the 1922 Committee of Tory backbenchers.
An anxious-looking Mr Lilley confessed he was "surprised" by the impact generated by what he called a mere "two-paragraphs" of his speech. "He was like a rabbit caught in the headlights," said one MP.
Mr Lilley appeared to blame the spin-doctors for spinning out of control, but Tory officials insisted they had not exceeded their brief.
At a heated meeting of the Shadow Cabinet, the attack was led by Michael Howard, Ann Widdecombe and Iain Duncan Smith. It was probably Mr Hague's most uncomfortable moment since becoming Tory leader. "Hague and Lilley achieved the impossible - uniting Howard and Widdecombe," quipped a shadow minister.
As the crisis deepened, some Tory MPs vented their anger on Mr Hague's secretive inner circle, accused of operating a "bunker mentality" and being too young and inexperienced. "He is a young leader and he needs a few old, wise heads," one said.
The targets included Daniel Finkelstein, the head of policy, and Andrew Cooper, the director of strategy, who are the architects of Mr Hague's "kitchen table Conservatism" - an attempt to focus on "bread and butter" issues. They have also pressed for the party to "slay the myths" that it would privatise public services before announcing radical policies on health, education and welfare. This is precisely what Mr Lilley was trying to do, before he "overshot the runway", as one Tory aide put it.
Also under fire was Amanda Platell, the former Fleet Street editor, who has had a baptism of fire since becoming the party's head of news and media last month.
But the Hague camp insisted that the advisers cannot be blamed, and directed its fire at Mr Lilley. "You can't blame the monkey; it was the organ-grinder," said an aide.
At first, Lady Thatcher was bemused by the row, suspecting it had been whipped up by a hostile media. But when she finally read the speech by Mr Lilley - a protege she promoted to her cabinet - she was said by aides to be "amazed" and "livid".
Two days ago, a senior Tory official, Michael Simmonds, a former Lilley ally appalled by his speech, was sacked for leaking the first draft (which was even harder in rejecting a Thatcherite approach).
Last night, Mr Hague was forced to make an unscheduled address to the 1922 Committee in an attempt to put on a lid on the affair. His advisers' hopes that he would "pick a fight" and "get noticed" by sceptical voters have been fulfilled - but not in the way they envisaged.
"We picked a fight with 95 per cent of the party," said one. "It was a battle we could never win."
Later, Mr Hague sought to bind the Thatcherites' wounds in a conciliatory speech to party activists in London. But the disarray in the Tory ranks was illustrated at a chaotic press conference held by Ms Widdecombe yesterday, which ended in a media scrum after she refused to answer further questions about the Lilley speech.
Ms Platell had to intervene, acting more like a nightclub bouncer than a spin-doctor. It was hardly the kind of image-making she had in mind when she joined the Hague team.
By last night, even the most loyal of Tory MPs were not denying that the past 10 days had been a total disaster. A senior MP said: "Ordinary people will not have noticed where we stand on public services. All they see is a division, division, division. How can that help us?"
With elections to local authorities and the Scottish and Welsh assemblies only a week away, Mr Hague may rue his decision to back Mr Lilley.
If the Tories fail to make a net gain of 1,000 seats in the council elections, a crisis of confidence in Mr Hague's leadership looks inevitable. Throwing Mr Lilley to the baying wolves will not prevent that.Reuse content