The health service has significantly improved its performance, says its chief executive.
A waiting time target of 18 weeks has been set for 2008
Sir Nigel Crisp said waiting lists are down by 12% from last year and 35% from their peak of six-and-a-half years ago.
His annual NHS report also says there has been a fall in waiting times, and a 36% cut in delayed hospital discharges.
But the Liberal Democrats said many people are still facing long delays for diagnostic tests, which are not included in the waiting list figures.
Sir Nigel said the total number of patients waiting for an operation in
England was 857,221 in October.
This was up 621 from the previous month, but down by 12% on the comparable figure last year.
Since the peak in 1998, the total waiting list has dropped by 455,397 - a
fall of 35%. The figure is now the lowest since the 1980s.
But the Liberal Democrats said those statistics do not tell the full story.
They said many patients face delays for diagnostic tests, such as scans, before they go onto the waiting lists.
Patients are currently only included in waiting list figures from after their final diagnosis, omitting around two-thirds of the total waiting time.
In June, Health Secretary John Reid set a new waiting time target of 18 weeks from GP referral to hospital treatment by 2008, with an average wait of around 10 weeks.
This would include the diagnostic tests.
The Liberal Democrats surveyed 158 hospital trusts across England, about 90% of the total. Just under half replied.
The results showed some patients are waiting more than a year for diagnostic tests.
Areas of progress
NHS Direct and NHS Direct Online provide first point of contact with the NHS for 13m every year
Only 57 people waiting over nine months for an operation in October 2004 - compared to over 125,000 in March 2000
Over 99% of suspected cancer cases seen by specialist within two weeks of referral
205,000 people stopped smoking after using NHS cessation services in 2003/04
An increase of 5,640 doctors and 18,800 nursing staff in the 12 months to September 2003
Liberal Democrat health spokesman Paul Burstow said: "There are still an awful lot of people on these hidden waiting lists just waiting to get a diagnosis.
"For some...we may well find that the diagnosis comes too late to actually save their life."
The survey found patients were waiting up to six months or more in two out of five NHS Trusts for routine MRI scans.
One in 12 trusts had MRI waiting lists of over a year.
Similarly, about one in 10 reported waiting times for CT scans of six months or more.
Sir Nigel's report says the NHS is getting more efficient - productivity is rising and better purchasing deals on drugs and IT are saving the NHS millions of pounds.
It also claims that patient satisfaction levels are high.
Sir Nigel told the BBC Radio Four Today programme that the NHS had improved year on year since the introduction of the 10-year NHS Plan in 2000.
For instance, there has been a 27% reduction in death rates from coronary heart disease between 1995/97 and 2001/03, and death rates from cancer have fallen by more than 12% in the last six years.
However, he accepted that there were areas of the country where the wait for diagnostic tests were too long.
"We said we have got to tackle the big impacts first. Get people to take statins, deal with thrombolyosis - the clot buster drugs, and get the waiting list for treatment down.
"But we now need to move on and tackle these diagnostic waits.
"The NHS a few years ago really was in a pretty poor state. We are investing heavily in it, we are seeing a lot of changes happening, but it is only four years on."
Shadow health secretary Andrew Lansley said the government were all talk.
"About a million people are still waiting for operations.
"The target culture means fiddled figures on waiting lists.
"The average time spent waiting for operations is higher.
"The targets have meant hospitals pushing patients through beds even when they should be closed for cleaning to get rid of infection.
"NHS staff are working very hard to treat patients more quickly and safely but the taxpayer is still not getting value for money.
"The government's targets are a hindrance, not a help."
Niall Dickson, chief executive of the healthcare watchdog King's Fund, said solid progress had been made.
But he said more needed to be done to tackle long term conditions, such as asthma and diabetes, more staff were needed, as were better methods to assess what the NHS was actually doing.
Mr Dickson said: "This is a crucial moment for the NHS. While central targets have had an impact in helping to improve the health service, on their own they are not enough. Now we are moving to a new landscape, with more and varied organisations providing health care."
Nigel Edwards, director of policy at the NHS Confederation, said: "Today's report demonstrates the great achievements that have been made in the NHS over recent years.
"It gives the lie to those who claim that the additional investment has been squandered - in truth, patients are now seeing real benefits."