Lord Howe, whose differences with Baroness Thatcher over Europe led to his resignation and triggered her downfall, said Cameron had "opened a Pandora's box politically" through his plan to renegotiate the UK's relationship with the European Union.
In a strongly-worded attack he said the Tory leadership was "running scared" of its backbenchers and had allowed Euroscepticism to "infect the very soul of the party".
Writing in The Observer, Lord Howe said the row over the lack of legislation paving the way for the prime minister's referendum by 2017, which led to a total of 116 Tories opposing the Government's legislative programme, marked a "new, almost farcical, low" for the party.
He wrote: "Sadly, by making it clear in January that he opposes the current terms of UK membership of the EU, the prime minister has opened a Pandora's box politically and seems to be losing control of his party in the process.
"The ratchet-effect of Euroscepticism has now gone so far that the Conservative leadership is in effect running scared of its own backbenchers, let alone Ukip, having allowed deep anti-Europeanism to infect the very soul of the party.
Howe is the third senior Tory lord to attack Cameron over Europe. Earlier this year Lord Heseltine warned Cameron over the dangers of holding a referendum.
Lord Lawson was even more forthright at the beginning of May when he called for Britain to quit the EU.
Last week two cabinet ministers, Michael Gove and Philip Hammond, echoed Lawson when they both publicly stated they would vote to leave the EU if given the choice.
Cameron faces an added threat from a surging Ukip who are gaining unprecedented poll ratings with their anti-EU stance.
Lord Howe added: "The risk now is that, if it loses the next general election - a far from negligible possibility - the Conservative party will move to a position of simply opposing Britain's continued membership, with or without a referendum."
Lord Howe said the United States looked to the UK to play a leading role in Europe and leaving the EU would "be a tragic expression of our shrinking influence and role in the word".
The former chancellor added it would represent "the humbling of our ambitions, already sorely tested by the current crisis, to remain a serious political or economic player on the global stage".
He claimed "clear thinking" and "strong leadership" was needed to protect the UK's status within the EU.
"Last week has shown that the Conservative party's long, nervous breakdown over Europe continues and what is essentially a Tory problem is now, once again, becoming a national problem. Serious mistakes have been made, but the situation is not irretrievable," he wrote.
"What is needed is a mixture of clear thinking, strong leadership and an overriding concern for the national interest, not party management or advantage.
"If the Conservative party is losing its head, a heavy responsibility now rests with Labour and the Liberal Democrats to hold their nerve and stick to a path they know to be right. In the complex and interdependent world we inhabit today, to walk away from the European Union into the unknown would be a very dangerous choice indeed."
Further compounding Cameron's problems is the attitude of Tories towards their own grassroots members.
Yesterday Lord Feldman, the co-chairman of the Conservative Party, was forced to deny describing grassroots activists as "swivel-eyed loons".
Health Secretary Jeremy Hunt insisted the Tory party was "absolutely united" on the issue of Europe and Lord Howe's views did not "represent the reality" of the situation.
He told BBC1's Andrew Marr Show: "If you look at the substance of the issue, the Conservative Party is absolutely united.
"We look at the European Union and we worry about Britain's ability to compete in the global race, we look at the regulations and the red tape that comes from Europe, yesterday some new regulation about selling olive oil in restaurants.
"If you go into the boardrooms in New York or Tokyo or Singapore they think the European economy is frankly a joke."
Mr Cameron was "showing leadership" on Europe by promising to work to change the relationship with Brussels and the Tories were the only party prepared to "do the heavy lifting on this".
Mr Hunt added: "Of course we have a debate. Patriotism runs deep in the veins of all Conservatives and when you have qn issue of sovereignty it's something we debate fiercely."
But he said "don't underestimate David Cameron" because he had shown through his use of the veto and securing a cut in the EU budget "this is someone who has delivered a very great deal".
Tory former Cabinet minister John Redwood told the programme: "We are very happy with the policy of negotiate and decide. What we want is for him to get on with the negotiation.
"We want this new relationship and to make sure the new relationship is a good one that most British people can accept, that has to be put to the British people - do you want the new relationship or would you simply rather simply not be part of it at all."