She was the prime minister at the height of her powers, using every arm of the state to crush the striking miners. He was the Soviet heir apparent who had authorised a large donation to help striking comrades in the UK.

Now newly released Downing Street documents have shed fresh light on the relationship between Margaret Thatcher and Mikhail Gorbachev, exposing how Thatcher exerted intense diplomatic pressure on the future leader to successfully block a Soviet donation of much-needed cash to the strikers.

The documents, released to the Guardian after a five-year freedom of information battle, show how the pair clashed during the titanic miners' strike that convulsed Britain in 1984-85.

In October 1984, six months into the dispute, the National Union of Mineworkers was desperate for cash to fund the strike, because a judge had ordered the confiscation of the union's entire assets. The NUM leader, Arthur Scargill, had stepped up efforts to raise cash from the USSR; Soviet miners had responded by donating more than $1m from their wages.

To avoid the cash being seized by the court-appointed official who had been put in charge of the NUM's finances, it had to be transferred clandestinely to the union. The Soviets attempted to transfer the cash to an NUM bank account in Zurich, but it, like other accounts, was frozen.

The money bounced back, but Thatcher soon learnt of the manoeuvre and became worried. The proposed donation threatened to derail a planned visit by Gorbachev to Britain to foster better relations between east and west.

Gorbachev was at that time second-in-command of the Soviet Union and tipped to take over when the ailing leader, Konstantin Chernenko, died. The relationship between Thatcher and Gorbachev was beginning to blossom; she would later famously declare him someone with whom she could "do business".

Thatcher wanted to know whether Gorbachev had approved the donation, since the Soviet miners would have needed government permission to convert roubles into foreign currency. Colin Budd, an aide to the then foreign secretary, Geoffrey Howe, also warned in a confidential letter to Charles Powell, the prime minister's foreign affairs adviser, that there would be a "serious political row" if a Soviet coalmine foreman, due to accompany Gorbachev in the official delegation, addressed a rally of striking miners in the UK.

Norman Lamont, then an industry minister and later chancellor under John Major, was instructed by Thatcher to lodge a protest "with some force" over lunch with the Soviet ambassador. According to Budd, Lamont "stressed that the government viewed with great concern the transfer of money from the Soviet Union to the NUM. He said that the Soviet Union must understand that the UK government considered this a very serious matter … He hoped that the Soviet Union would not risk souring the atmosphere" of Gorbachev's forthcoming visit.

The British found the encounter "somewhat unsatisfactory", as the ambassador, Viktor Popov, appeared unmoved. "The ambassador simply maintained that Soviet trade unions were independent and democratic and that the Soviet government was not answerable for their exercise of their rights" to donate to their British comrades.

The Thatcher government intensified the diplomatic pressure. Three days before Gorbachev's visit in December, Thatcher ordered that the Soviet ambassador be summoned to the Foreign Office. There, David Goodall, a senior diplomat, told him that if the Soviet government had authorised the donation, the British government "would take a very serious view and regard it as an unfriendly and unwarrantable interference in British domestic affairs".

The following day, a senior Soviet official returned to the Foreign Office with a message stating that "any form of aid that might be given to the British miners would be undertaken independently by the Soviet miners without the slightest participation of the Soviet government or its departments".

At Chequers, Thatcher personally confronted Gorbachev and protested that the Soviet Union was meddling in British matters and would help to prolong the strike by giving the cash. Gorbachev stonewalled, claiming that he was not aware of any such donation. It later transpired that a month before the Chequers meeting, Gorbachev had himself signed the papers authorising the donation.

But Thatcher's diplomatic offensive worked: no donation reached the British miners during their year-long strike. Gorbachev had embarked on his effort to reform the sclerotic Soviet state and concluded that the wiser option was to continue cultivating the British prime minister for the sake of relations between the two countries. Sacrificing the interests of the British miners was the price to be paid for not upsetting the so-called Iron Lady.