Lady Thatcher's book may put pressure on her party
She stopped short of demanding withdrawal from the EU, but believes the notion is worthy of consideration.
She suggested the UK should join the North American Free Trade Agreement and said Britain should withdraw from the EU's common agricultural and fisheries policies.
Lady Thatcher's comments, in a book serialised in The Times newspaper, may embarrass Tory leader Iain Duncan Smith who has tried to play down the Europe debate.
In her book - Statecraft - Lady Thatcher describes the EU as "perhaps the greatest folly of the modern era".
She called Britain's membership as "a political error of historic magnitude".
"The preliminary step, I believe, should be for an incoming Conservative government to declare publicly that it seeks fundamental renegotiation of Britain's terms of EU membership."
Key objectives would be withdrawal from the common agricultural and fisheries policies and from the common foreign and defence policy.
'Cordial'
She insists that this need not result in British departure from the EU, but added: "It is frequently said to be unthinkable that Britain should leave the European Union.
"But the avoidance of thought about this is a poor substitute for judgment."
A Conservative spokesman said: "Naturally, relations between Iain and Lady Thatcher are close and cordial and she has done us the courtesy of sending an advance copy of the book.
"We will not comment directly on the book, but we will read it with interest."