Under proposals to be put before the EU summit in Austria this weekend, the Prime Minister will suggest that troops from member states should co-operate in a peacekeeping and combat role.
Mr Blair stressed that he did not want a standing European army run by Brussels, but the new approach could allow European countries to work under the authority of Nato without the United States.
In an interview with several European newspapers, he said he was prepared to ditch the previous Tory government's policy of vigorous opposition to an EU defence capability. He suggested that the new military structure could be used to deploy forces in areas such as the former Yugoslavia, though they would remain under national control.
The crisis in Kosovo "underlines the need for Europe to take a very hard-headed view of this and to make sure that it can fulfil its obligations and responsibilities properly."
Mr Blair will lead the summit debate, in what will be seen by many as an attempt to prove that Britain can still play a major EU role, despite its decision to stay out of the first round of the single currency.
He said he wanted to inject "fresh thinking" on defence policy . There was a need for Europe to understand its obligations and to ensure that it was able to speak coherently on foreign and security policy. "We should be prepared to think more boldly and imaginatively about how we do that," he said.
However, in an attempt to head off Tory criticism, Mr Blair made clear that any new co-operation would not replace Nato, even though some EU states backed such a move.
"We are not talking about European armies or the European Commission having a security role. We are not in any way talking about undermining Nato. That remains the absolute necessity and pillar of our defence policy."
He said the idea of a European defence role within Nato was first raised in Berlin in 1996 and he was simply keen to explore it further. "All I am saying is that we need to allow fresh thinking in this and it is important for Britain to be part of that thinking and not for us simply to stand there and say we are not part of this."
A Tory spokesman said last night: "The Government shouldn't do anything that undermines Nato - the organisation that has been the cornerstone of peace in Europe for decades."Reuse content