That brought an immediate denunciation from Lord Howe, s former Cabinet colleague was being 'recklessly irresponsible'.
He argued that the breakdown of the system added weight to calls for a European single currency; something that John Major has ruled out.
Lord Tebbit told BBC radio's World at One: 'The Government should say, 'We now realise that the critics of the Maastricht treaty have been right all along; that it is based upon a potential act of supreme folly, that of creating a single currency'.
'That concept is dead and should be interred, and should be buried, and we should jump on its grave at the conference which should be called now to establish a new treaty.'
Lord Tebbit said he did not expect the Prime Minister to do any of those things. 'That would be too much for him to take,' he said.
However, Lord Howe rejected Lord Tebbit's views, saying: 'I think it's very important not to be deluded by the kind of simplistic absolutism which has characterised his conduct of the debate in recent times.'
He said the greatest period of post- war stability had been achieved by the Bretton Woods agreement, under which a system of fixed but adjustable exchange rates had run from 1945 to 1971. The breakdown of that agreement was regularly cited by Margaret Thatcher as one of the reasons for keeping sterling out of the ERM until 1990.
However, Lord Howe said that the EC had been quite right to try to achieve a similar system, and to talk of 'dancing on the grave of the system is to be recklessly irresponsible, quite frankly'.
Having left the ERM last September, he added, no one was arguing that the British should rush back to the rescue. 'But for the system as a whole, I think that the objectives of a fixed but adjustable system are necessary for a single European market. It would probably be more and not less necessary in the end, I think, for a single currency because of the huge impact of currency movements across the exchanges.'
As for the mechanism's current problem, Lord Howe suggested that the Germans might temporarily withdraw, 'rather than everybody else being dragged down with it'.
The rejoicing was not confined to Lord Tebbit and other Maastricht opponents on the Tory benches of the Lords and Commons. Peter Shore, the former Labour Cabinet minister, said: 'Nothing could be more beneficial to the peoples of France, Spain, Denmark and the European Community than the break-up of the existing rigid ERM system and a fall in European interest and exchange rates . . .
'All those who consider that mass unemployment is the main threat to European stability and prosperity will rejoice if exchange and interest rates can be freed from the German- dominated ERM.'
Mr Shore, MP for Bethnal Green and Stepney, added: 'The break-up of the existing ERM would also expose the sheer nonsense of the Maastricht treaty and put a stop to its dangerous plan to establish an economic and monetary union.'
That view, shared by Lord Tebbit, underlined the political danger of the ERM collapse for the Prime Minister - with the opponents of Maastricht using the money market turmoil to reopen the dispute that Mr Major had thought resolved by last week's Commons vote of confidence.