The Queen became the first monarch to attend the British Cabinet since the 18th century as David Cameron welcomed her to Number 10 today.
She took a seat around the Cabinet table between the Prime Minister and Foreign Secretary William Hague for the weekly discussion of Government business.
Mr Cameron congratulated her on her "fantastic" Diamond Jubilee year and said the last monarch to visit the Cabinet was believed to have been George III in 1781.
Cabinet ministers stood around the table while the Queen was shown into the room by Mr Cameron and Deputy Prime Minister Nick Clegg.
After waiting for the Queen to take her seat, the Cabinet followed suit and the Prime Minister offered her a "very warm welcome".
"On behalf of everyone, I would like to congratulate you on a fantastic jubilee year," he said.
The Queen, who did not speak during opening remarks, was wearing a Stewart Parvin royal blue wool dress and matching coat, and a sapphire and diamond broach.
Mr Cameron said Downing Street had been researching the last monarch to visit the Cabinet.
George VI had met with the Cabinet during the Second World War, he said, but added: "We think the last time a monarch came to the Cabinet was in 1781, during the American War of Independence.
"But I'm happy to report that relations have improved slightly since then."
After his initial remarks, the Prime Minister said they would get on with a "proper Cabinet agenda" starting with an update on parliamentary business by the Chief Whip, Sir George Young.
The Cabinet gave the Queen 60 table mats with images of Buckingham Palace as a gift, Downing Street said.
It also made a donation to the Queen Elizabeth Diamond Jubilee Trust, set up as part of the celebrations to mark her 60 years on the throne.
The Foreign Office has also announced that an area of British Antarctica has been named Queen Elizabeth Land.
The Queen spoke twice during Cabinet.
During discussions about the next Queen's Speech, she suggested it should be on the shorter side, Mr Cameron's spokesman said. And before leaving she wished ministers a happy Christmas.
The table mats were suggested as an appropriate gift by Buckingham Palace, the Prime Minister's spokesman said.
The bespoke, hand-finished mats were made by a Gloucestershire company called Lady Clare Limited.
The spokesman refused to disclose the value of the gifts.
The Prime Minister's spokesman said: "The Queen was an observer at Cabinet. She did speak on two occasions, the first of which was near the end of discussion on parliamentary business, where, I think it's fair to say, very gently and very humorously, on the section regarding the next Queen's Speech encouraged it to be on the shorter rather than the longer side.
"And then on leaving Cabinet at around 10.45 she wished them all a very happy Christmas."
Leader of the Commons Andrew Lansley was the only member of the Cabinet who was not in attendance for the Queen. The spokesman said Mr Lansley had been "unfortunately and unavoidably delayed, so wasn't able to attend".
Communities Secretary Eric Pickles said all Cabinet ministers had ensured their shoes were "shiny, freshly polished - obviously with the exception of Ken Clarke, who wore his customary Hush Puppies".
"The Queen seemed very relaxed, in a very good mood and took an enormous interest in the Cabinet discussion," he told BBC Radio 4's The World At One.
"I think people were perhaps more considered in what they say, but nevertheless it was a proper discussion on the general economic situation and the inflation figures and Afghanistan."
Asked whether she might have enough table mats already before today's gift, Mr Pickles said: "One can never have too many table mats."
He dismissed suggestions from some that the Queen was crossing a constitutional line by attending the Cabinet.
"We are her Cabinet, we operate for her. She was sat in the seat where the Prime Minister traditionally sits and, given it's her Cabinet, she can come any time she wants."