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"She would have just been the naughtiest, funniest and the best ever, just because she loved her boys so much and she would be so proud of all of them and what they've achieved," she said, when asked what kind of a grandmother Diana would have been.
CLICK ON PHOTO TO SEE A GALLERY OF PRINCESS DIANA WITH WILLIAM AND HARRY
Sarah, Duchess of York: "Diana loved her boys so much"
"They really are extraordinary boys and Catherine is incredible. I just think it is all goodness and we need to hear more about goodness, and Diana would have loved that," she added, to applause.
Sarah also spoke with great affection about Prince William and Kate. "I believe in love," she said. "I believe in the goodness of love and I think they are a beautiful example of a great family, totally in love, and with that delicious little George, so squishy - you know you want to eat him."
'Delicious' Prince George with the Duke and Duchess of Cambridge
In April, the royal couple will welcome their second child together – and Sarah was asked about reports in the US that they are expecting a little girl they will name after Diana. "Ummm, no," she replied. "I have not heard that."
During her appearance, Sarah spoke briefly to again defend her ex-husband Prince Andrew, who she divorced in 1996 after ten years of marriage. "Knowing him as I know him, he's one of the greatest men I've ever met in my life and my best friend and great father to my children," she said.
Sarah Ferguson spoke about the late princess on The Meredith Vieira Show this week
"I don't understand in this day and age how people could make salacious lies up and how the media can then write about it and then follow up on it… This is defamation of character, of a person that is the opposite of how he's being portrayed.
"Buckingham Palace put out a denial on his behalf, that's how it works with the Royal Family. They stand by that denial. There is nothing more to be said."