Records show that civil servants viewed the meeting of the two political leaders, on the fringes of an EU summit in Brussels, in June, 1987, as an opportunity to re-establish good relations.
The pair had famously clashed at an Anglo-Irish summit in 1980, during Mr Haughey’s first term as Taoiseach.
At their meeting in Brussels, Ms Thatcher described the political situation in Northern Ireland as “terrible”, because terrorism was continuing despite the signing of the Anglo-Irish Agreement.
She expressed horror at the “enormous” number of IRA murders in previous months and recalled how the British government had been led to believe that the security situation would improve following the agreement.
While the British prime minister restated her determination to implement the agreement, she said she could not stress enough how disaffected Unionists had become.
“I did not expect the extent of this disaffection at the time I signed the agreement. I thought that the document had all the requisite guarantees upfront.
“But it is not logic, but emotion, that governs their actions,” she said.
She later remarked: “The SDLP are not as helpful as they could be.”
Mr Haughey reassured the British prime minister that the Irish government would handle the Anglo-Irish Agreement sensitively.
He also praised Ms Thatcher for being the first British leader to tell Unionists that there must be progress.
“You have stood firm and that is an historic contribution to Anglo-Irish relations. You must not forget that,” Mr Haughey said.
He acknowledged the high number of IRA incidents on “soft targets”, but stressed that cross-border security co-operation had improved.
Conscious of Ireland’s difficult economic circumstances at the time, Ms Thatcher said she realised that Mr Haughey might have problems with resources.
Jokingly, he responded by suggesting she could lend him £2bn.
A briefing note, in advance of the meeting, prepared for Mr Haughey, advised him that while Ms Thatcher was firmly committed to the Anglo-Irish Agreement, she could sometimes be “self-righteous, not to say exasperating”, in terms of her views on extradition and security co-operation.
It recalled she was originally sceptical about the agreement, due to the lack of any deep historical feel for Northern Ireland.
However, it said Ms Thatcher now had little or no understanding of the Unionists’ opposition to an agreement which she regarded as reasonable.
The author of the briefing document, Noel Dorr, the secretary general of the Department of Foreign Affairs, warned Mr Haughey to expect that she might “preach” at him about security issues.
Mr Dorr suggested that while the Taoiseach might wish to argue points to defend Ireland’s position, he could consider showing a measure of patience, which could have longer-term benefits.
Mr Dorr said this was the dilemma that the Irish side faced in meetings with Ms Thatcher, because of her personality and approach.