Police made nine arrests and charged five people with being drunk and disorderly during the party in the city's Trafalgar Square, where people sipped cider and Champagne and chanted anti-Thatcher slogans.
The festivities organized by Thatcher's most strident critics were an indication of the depth of the hatred which some Britons still feel for their former leader.
"We've been waiting a long time for this," Richard Watson, a 45-year-old from eastern England wearing a party hat, said. "It's an opportunity of a lifetime."
As a huge effigy of Thatcher — complete with hook nose and handbag — made its way down the stairs in front of the National Gallery, the crowd erupted into cries of "Maggie! Maggie! Maggie! Dead! Dead! Dead!" and sang lyrics from the "Wizard of Oz" ditty "Ding Dong! The Witch is Dead."
Participants clutched their umbrellas in the rain between Nelson's Column and the National Gallery on the square.
Britons remain deeply divided over Thatcher, who died Monday aged 87, and the debate over her legacy has revived the strong feelings that marked her more than decade-long term in office. Thatcher's funeral is Wednesday and police are bracing for possible trouble along the procession route in central London.
Widely respected on the right for reviving Britain's economic fortunes and besting Argentina in a war over the Falklands, Thatcher is reviled by some on the left for her bruising confrontation with the country's union movement and her perceived indifference to its working class.
Some in the crowd said they didn't want to dance on Thatcher's grave, but they did want to mark their opposition to what she stood for.
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"I'm not here to celebrate Thatcher's death," Andy Withers, 49, said. "But what's going on tonight is part of the legacy she created."
The ceremonial funeral for Thatcher will be held at London's St. Paul's Cathedral.
Prime Minister Stephen Harper and former primer minister Brian Mulroney will be among dignitaries attending.