Former Environment Secretary Owen Paterson has called for Britain to leave the EU and negotiate a free trade agreement with the rest of Europe.
He also said Britain should give notice to quit the EU before negotiations begin ahead of the in/out referendum promised by David Cameron.
The PM is under pressure to reduce EU migration and is expected to set out his plans in a speech before Christmas.
Meanwhile, a think tank called for cuts to in-work benefits for EU migrants.
Open Europe said access to tax credits should be restricted, reducing migrants' take-home pay, making "a huge difference to potential migrants' financial incentives".
The prime minister's promise last year to hold a vote on Europe in 2017 if the Conservatives win the next election was seen as an attempt to halt the rise of UKIP, which senior Tories feared could prevent them from winning an overall majority at next May's general election.
But four days after UKIP defeated the Tories in the Rochester and Strood by-election, Mr Paterson suggested to Mr Cameron he had to be prepared to leave the EU if he wants negotiations on a new relationship with Brussels to succeed.
He urged him to give a manifesto commitment to invoking article 50 of the Lisbon Treaty.
This would give formal notice of Britain's intention to quit the EU and would spark two years of negotiations ahead of a 2017 referendum.
Mr Paterson, who lost his Cabinet job in the summer, used his speech in London to the Eurosceptic Business for Britain group to say making such a pledge could be "enormously attractive to uncommitted voters".
And he said it would give the UK's negotiators a very clear mandate.
Mr Paterson made clear his own preferred option would be for the UK to withdraw from the political structures of the EU and instead, like Norway, forge a trade deal, which would include access to the single market.
After his speech, he told the BBC that Britain had come to a "fork in the road" in its relationship with the EU.
He said: "To sort out the nightmare of the euro, they have got to form a cohesive, effective new state.
"And meanwhile, we withdraw from the political arrangements and we concentrate on trade, which gives us an opportunity to get our seat back on the supra-national bodies which actually decide regulation affecting virtually every business in this country."
Downing Street did not comment ahead of the speech but the BBC's assistant political editor Norman Smith said it would have been met with a "collective groan" given No 10's negotiating objectives were likely to be much more limited.
Deputy Prime Minister Nick Clegg said Mr Paterson's proposals would be a "spectacular own goal", saying three million people's jobs depended on EU membership.
And Labour leader Ed Miliband said the Conservatives were "sleepwalking towards the exit door of the European Union".
"David Cameron only has himself to blame because he's given encouragement to those people in his party who think that's the right option for Britain," he said.
On Sunday, Home Secretary Theresa May admitted the UK was "unlikely" to meet Mr Cameron's target of reducing net migration to the tens of thousands before the general election, saying the scale of EU migration had "blown us off course".
Mr Cameron has called for changes to the principle of free movement of people, but this has been rejected by some other EU leaders.
Open Europe said that rather than trying to cap free movement, the government should restrict access to benefits paid to EU migrants who are in work.
The think tank's director, Mats Persson, told BBC Radio 4's Today programme people could use in-work benefits to "top up their basic pay", meaning their take-home wages were higher than they would be in their home country.
Last week, Labour called for changes to in-work benefits for EU migrants, saying tax credits were being used to undercut wages.
But Witold Sobkow, the Polish ambassador to the UK, said workers were attracted to the UK by the wages, not the benefits.
And asked whether the Open Europe proposals were discriminatory, he said: "Of course, because we pay the same taxes which pay for tax credits, doing the same job."