Liam Fox warned the Prime Minister he would be guilty of "dangerous complacency" if he failed to address the damage Nigel Farage's party could do at the ballot box.
In an interview with The Sunday Telegraph, the Eurosceptic called for the party to drop the "statistical nonsense" and develop a "clearer narrative" on immigration.
Dr Fox said the Ukip leader, was "personable and reasonable" and that many of his views were shared by "decent and patriotic people".
It comes after migration experts and rival politicians accused the Government of losing its grip on immigration policy as official figures revealed earlier this week that the net flow of migrants into the UK surged year-on-year by more than a third to 212,000 in the 12 months to September 2013.
Liberal Democrat Business Secretary Vince Cable said the figures were "good news for British workers" and showed that the Conservative drive to get net migration under 100,000 - which has never been accepted by the Lib Dem side of the coalition Government - was "unworkable".
Meanwhile, the Conservative leader of Guildford Council said that he feared the borough would lose its Tory majority for the first time in 12 years and that MP Anne Milton would be defeated at the election because of government policies.
In a letter to Mr Cameron, Stephen Mansbridge accused the Prime Minister of undermining the party's chances of winning at the next election, saying: "We have lost many Conservative Party members - indeed whole branches of the local association - due to various government policies, and Ukip won over 20 per cent of the vote in the local elections last year in Surrey.
"Immigration, the EU and gay marriage are frequently given as reasons for this."
Dr Fox told the Sunday Telegraph that a radical change of direction was needed by the Tories, and that "current betting" suggested Ukip were favourites ahead of the European polls on May 22.
He said warned that if Ukip does well, it would be dangerous to compare it to the successes of minor parties in the past that have gone on to do badly at the following general election, urging the Tories to avoid "complacency".
He also said they should not attempt to outflank Ukip from the Right, but "set out a positive vision, clear philosophy and definable objectives".
Instead they should win back voters who have switched allegiance by highlighting the "unavoidable consequences" of a Ukip vote.
Dr Fox said: "If the Tories are to bring back enough of these voters to win an overall majority at the election, then there needs to be a clearer narrative on immigration, stressing not only the need to restrict numbers, but also to determine which individuals, with what skills enter our country."
Home Secretary Theresa May dismissed the claims but conceded that whatever the Government does it cannot end the "overwhelming incentive" for people to move to richer nations like Britain.
"In all honesty, whatever the Government does to reduced the pull factors that draw people to Britain, as long as there is such an enormous disparity in terms of income per head, there will be an overwhelming incentive for people to move from poorer nations to richer states."