He acknowledged there were justifiable concerns about immigration but condemned the way that foreign incomers had been blamed for taking British jobs.
The former prime minister, who denied any ambitions for a senior European role, said that leaving the EU would be “traducing” the country’s national interest rather than standing up for Britain.
In a speech at London Business School he set out a “manifesto for change” across the continent.
With the prospect of an in/out referendum in 2017 if David Cameron remains in No 10, Mr Blair said: “It is not those who argue that Britain should be in Europe who are at odds with our nation’s history, but those who under a false banner of independence would make this country dependent on global powers and their manoeuvres that we would be powerless to influence or inhibit; who would have us exit from a principal stage of the world, on the grounds that we would be better able to write our own script, when all that would in reality happen is that the stage would remain, the play would continue, the actors would act, but without our participation?
“This is not satisfying our national interest; it is traducing it.”
He acknowledged globalisation meant the world felt “frightening and insecure” but dismissed arguments for closing off the UK to immigrants.
“The answer to the white, working-class unemployed youth in alienated communities in Britain is not to tell them their problems would be solved if there were fewer Polish people working in the UK,” he said.
Instead they needed the skills to compete, he said. “It actually holds them back by giving them a grievance and not a chance.”
Nigel Farage’s party made changes to the immigration system a key part of their successful election campaign.
Mr Blair called for the return of the scrapped ID cards as a way of addressing public concerns.
But he said it was “dangerous and wrong” to blame immigrants for trouble getting a job. He said: “People can understand that immigration may be a good thing but they want some rules and order about it.
“I think you have got to distinguish between that and a desire to keep out people who are different, which I think is a regressive and a reactionary view you just have to take on.”
He said it was “dangerous and wrong for leaders in British politics” to give people the idea “that what’s holding them back is that somebody is coming in and taking that opportunity from them”.
He said: “It isn’t true and so it’s not helpful.
“Actually if you look at what’s going to make this country great in the future it’s to use the connections that Britain has – its language, its position in the world, its history, to make that connectivity.
“If we do that we are going to be highly successful as a country.
“We are never going to do that by an attitude that says ‘We don’t like foreigners’.
“You have got to distinguish between the justifiable concerns and the desire for order and what is, in the end, a prejudice that is neither very pleasant or very fruitful.”
Mr Blair, who has been linked with the presidency of the European Council in the past, denied any interest in a Brussels post.
He insisted: “I’m not a candidate, don’t get my position mixed up with this, that’s not going to happen.”
On the Commission presidency, he simply stated that the role should go to “the best person to do the job”.
Opportunity for vote on Europe: Page 11.