The rapprochement ensures that Labour will go into the next election with a manifesto commitment to holding a referendum on proportional representation - the Liberal Democrats' central demand.
The two men spoke at length during VJ Day ceremonies, and patched up the dispute arising from the vituperative Littleborough and Saddleworth by-election campaign.
There had been growing speculation that Mr Blair would shelve the commitment to a referendum on electoral reform which was made by his predecessor, John Smith. But sources confirmed that the party will now write the policy into its manifesto without specifying a timetable for a referendum to take place.
Mr Blair's allies pointed out that both leaders showed restraint by not intervening in the by-election post-mortem, and stressed that the Labour leader has a good relationship with Mr Ashdown. One said that "normal business will be resumed".
Mr Blair and Mr Ashdown have agreed not to make personal attacks on each other, and to work jointly on policies for reform of the welfare state, health, Europe and constitutional change.
Senior Liberal Democrats argue that the commitment to a referendum on proportional representation is one of the most important tests of whether Labour is committed to becoming a "reforming" government.
Meanwhile Labour stepped up its campaign against the Conservatives by suggesting that part of the salary paid to Michael Heseltine, the Deputy Prime Minister, should come from Conservative Central Office rather than the public purse.
A senior source claimed the Tories now have three Cabinet ministers, including Mr Heseltine, whose primary job is to propagandise against Labour. John Prescott, Labour's deputy leader, will be monitoring Mr Heseltine's activities.
The Shadow Chancellor, Gordon Brown, is to consider a series of proposals to tackle youth unemployment, which, he said, had reached 29 per cent in inner London. Labour would consider raising the pounds 38,000 threshold above which small companies enter the VAT system, if they are prepared to take on young unemployed people.
Other plans include the abolition of the 16-hour rule, which prevents unemployed people receiving more than 16 hours of education a week, and the establishment of a "green corps" or environmental task force. This could form part of a voluntary Citizens' National Service performing work in the community. Advice for young single mothers on child care would be co-ordinated by one-stop shops to aid the transition from welfare to work.
Mr Brown said that he wanted to "launch a crusade as Chancellor to attack youth unemployment as a personal disaster, a social evil and as a massive economic waste".Reuse content