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I shivered because, even before the thought had formed itself, I felt this was something new, something neither I nor anybody else had anticipated. But it was also something ambiguous. Of course Diana changed the world, I concluded in my report from the abbey. What I carefully did not say was whether it was for the better or the worse. I did not know. I still don't. But since then some aspects of that change have become clear. And ominous.

Diana's violent death was shocking in itself, but even more shocking in its impact. It unleashed the energy of some hitherto buried, primitive faith. Nobody could walk through the quiet crowds that gathered to mourn outside Kensington Palace without feeling the intense pressure of a kind of popular religious revolt.

The people were making her their saint whether the media or the royals liked it or not. She was to be the saint of bulimia and anorexia, of diet and fitness obsessed adolescence, of marital breakdown, of publicly confessed private misery, of hearts worn on sleeves, of pop, of fashion and of high-profile globalised goodness. She was to be the saint of a sub-political democracy of feeling, the saint of all those who, through ignorance, failure or injustice, felt left out. The applause came into the abbey from outside; it was started by those who had not been invited.

Then, suddenly, it was new Labour new Martyr. In power for just four months, Tony Blair, in a flash of something like political genius, seized the initiative. By a single, early appearance on television, he identified with the popular grief, linked it to the touchy-feely populism of new Labour and turned the whole confection into a national paroxysm of caring that was to be orchestrated by his own spin doctors. And it all hinged on that killer phrase, "the people's princess", that has since entered the vernacular. It was cynical but brilliant. After that we - the media, the royals, Elton John, Diana herself - had little more than walk-on parts in what was to become a Festival of Spin.

In the days between the death and the funeral, Blair annexed the royals. Besieged and bewildered at Balmoral, they found themselves with a problem of what is euphemistically called "presentation" but, these days, is more correctly called "spin". In life, Diana had plainly been a loathed royal reject who, nevertheless, earned respect and a sizeable divorce settlement by the controlled and devastating use of her media power. In death, however, she was a raging monster of mass anger. Sure, her people were peacefully at the gates, laying flowers. But, in those delicate days, it seemed that one wrong move from the royals would have sent them storming the palaces like the Bolsheviks, reclaiming the monarchical mansions just as their applause had reclaimed the abbey.

The royals were vulnerable. They had suffered from years of appalling media advice and now was not the time to summon daft old courtiers. Now was the time for Alastair Campbell and Peter Mandelson, Blair's frontline spinners.

This will come to be seen as a crucial moment in British history. It was crucial because it was the moment at which, in death, Diana saved the monarchy from the wounded, haughty contemplation of its own dysfunction - but only by turning it into something not worth saving. For it was the moment at which Tony Blair became a monarchist.

Prior to that moment, his attitude to the monarchy had been lukewarm verging on the dismissive. There was, for example, the incident known by Tony Holden, the best of the royal watchers, as the "Hitchens wink". In opposition Blair gave an interview to the journalist Christopher Hitchens for the American magazine Vanity Fair. Asked about the monarchy, Blair gave an anodyne answer. But it was accompanied by a startling, subversive wink, a visual statement so gross that Hitchens felt obliged to record it. Did it mean he regarded the monarchy as a joke, a political sitting duck waiting to be shot?

Then, in power, he adopted a regal pose of his own, processing through adoring crowds. He made it clear that he might well have better things to do than calling on the Queen every Tuesday in the manner of prime ministers since Churchill. Add to that the fact that, after May 1, the vast majority of the parliamentary Labour party was almost certainly republican and it becomes clear that the crown was far from safe under new Labour.

But, since the death of Diana, all that has changed. The spin doctors moved quickly. By the day before the funeral even the Queen was on message, delivering a television tribute that dripped with spin.

The monarchy has now ceased to be a silly, wink-worthy irrelevance and become a suitable case for "modernisation". Streamlining, already in progress, has been accelerated with the demise of the royal train, the royal yacht Britannia and any number of bizarrely titled palace officials. The millions of public money that supports the royal household is to be opened for scrutiny by the National Audit Office and parliamentary committee. A whole flock of secondary royals are to be ejected from Kensington Palace, which is to become a "people's palace". Stories now appeared weekly about the radical, Blairist reformation of the monarchy.

Spin was everywhere. On his South African trip Charles was suddenly genial towards the very pressmen he had disdained for so long. He ushered Prince Harry into the presence of the Spice Girls. He let it be known he would not challenge the tax bite on Diana's estate because, it was claimed, it would not go down well with the people. The mark of Mandelson was on the man. Even the Queen had loosened up. In one particularly startling sign of her Dianification, she was photographed having her hand massaged by an aromatherapist, a gesture that, only a few months before, she would surely have regarded as grotesque. She even appeared among the crowds at her golden wedding celebrations holding a balloon, the sort of fun touch at which Diana had excelled.

In fact, it was the golden wedding that finally and fully proclaimed the extraordinary anschluss between Blair and the monarchy. On the one hand the prime minister affirmed his new-found monarchism - identifying himself as Disraeli to Elizabeth's Victoria and praising her wisdom to the skies. On the other, both the Queen and Prince Philip indulged in the language of caring and relationships. She even seemed to draw the Blair family into the charmed circle by referring to their own golden wedding in 2030. She spoke also of the PMs she had known.

The first, Winston Churchill, had charged with the cavalry at Omdurman. She said: "You, prime minister, were born in the year of my coronation."

This was, without question, a grandmotherly embrace. But it was the result of a deal. Blair's spinners had steered the royals through the post-Diana crisis and he had adopted a positive, even loving monarchist tone. The Queen, in return, gave him her public blessing and agreed to the "repositioning" of the monarchy.

And all because a drunken chauffeur had rammed a Mercedes into a concrete column in Paris. Politics is a strange carnival of contingency. "Events, dear boy, events", as a Tory grandee once put it.

Arguably the Queen had no choice. Her own repositioning of the royals in the early 1960s had gone disastrously wrong. Advised by William Heseltine, her then secretary, she had refocused the monarchy on the concept of the ideal family. A television documentary admitted us to the ideal household. But her family failed her, descending into a nightmare of marital collapses, punctuated by Fergiesque high jinks and burning castles. Public support for the monarchy had, according to one survey, halved in 14 years and her Christmas message was watched by only 11m people last year compared to 28m in 1987. Even without the death of Diana, a new initiative was needed if the monarchy was to survive. But survive as what?

Like all politicians, Blair will go as suddenly as he has come. Indeed, to me, he seems more ephemeral than most. His glaring political pragmatism makes him an inconstant and obviously doomed companion. An economic crisis - and there will be one within 18 months - and a backbench revolt - there is already one of those - will test his brilliant management of events to the limit. When the time comes, might not republicanism be an easy piece of meat on the bone to toss to the dogs of his new democracy?

Plus there is this matter of spin. Spin means organised lying and the key word in that phrase is "organised". All politicians in a democracy are obliged to lie, but spinners lie systematically. They institutionalise the process. Spin supersedes all other realities. Once you start spinning you can't stop because, if you stop, there is nothing left to be said. But all spinners will, sooner or later, lose credibility. They will fade and die to be replaced by more fashionable doctors. That is how contemporary democracy works - by the constant succession of different but equally illusory systems of presentation.

No monarchy can afford to depend on such a state of affairs. Monarchy is about continuity and a certain symbolic fullness or it is about nothing. Spin is temporary and empty. Even if the Queen and Prince Charles were the most gifted spinners - which they are not - they could not hope to surf the waves of public sentiment for long.

So the royal future is, I believe, as bleak as ever. Even if the monarchy does survive Blair, its options are desperately limited. It can either continue with its programme of Dianification, the pursuit of depthless imagery and easy gesture. Or it can streamline itself into quiet insignificance, reducing its burden on the public's purse and patience by becoming irrelevant. This, in the long term, is the course I would recommend. It is difficult, maybe impossible, because it involves damping down the media frenzy of interest in the Windsors. But spin is certain death and the restoration of ancient, monarchical magic is out of the question. There is no real choice left but quiet survival.

Diana changed the world in ways that have yet to become clear. But her impact on the politics of royalty is already evident. Hers was, without doubt, a great death. I, like almost everybody else, was moved to tears in the abbey.

The Church of England - another institution facing the threat of Blairist modernisation - staged a ritual of overwhelming aesthetic grandeur that lifted even Elton John and the feudings of the Spencers into the splendour of a great and extraordinary history. We may never see anything like that again. And that, almost certainly, is the point. For our tears were tears of loss - not, I now realise, the loss of Diana but of something much, much bigger.

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