Downing Street defended the Prime Minister's decision to attend the event in Siena, Tuscany, as a purely personal one. "He was at the Palio, which is a long standing cultural tradition in Siena, in a purely private capacity," a Downing Street spokesman said.
Mr Blair watched the race in the medieval heart of Siena with his wife, Cherie, and their three children. Defence Secretary, George Robertson, also attended the race which was attended by 40,000 curious tourists and fanatical locals.
Animal rights campaigners have warned the Prime Minister that attending the event where riders whip their horses and sometimes each other would be a serious mistake.
Andrew Tyler, director of Animal Aid, said that although refusing to travel to the event would risk upsetting his Italian holiday hosts, Mr Blair would incur the wrath of the animal rights lobby at home if he did go. "It is a primitive spectacle which appeals to the worst instincts in human nature," he said.
"If he thinks that it is more important to be sitting next to some dignitary rather than acting with integrity, then he is making a serious mistake."
The event, which dates back to the 14th century, is run each year in the Campo, the cobbled square in the centre of Siena, amid much colour and pageantry, and is a source of intense local pride.
The race is run every July and August and is a two-minute affair in which jockeys representing different parts of Siena ride their horses bareback three times around the piazza.
But despite the square being spread with sand and the corners of buildings padded with mattresses, critics say the three-lap race around the Campo leads to frequent injuries - and even deaths - among the horses and should be banned.
According to Italy's Anti-vivisection League, which campaigns against cruelty to animals, a total of 43 horses have been killed since 1970 as a result of falls in the Palio.
Mr Blair and his family have now left San Rossore and are staying in the picturesque town of San Gimignano at a villa belonging to the prominent Strozzi Guicciardini family.
t The Prime Minister has donated more than pounds 3,000 to an Italian paediatric hospital in Tuscany, where he and his family are spending their holidays.
"(Mr Blair) made the donation as a sign of gratitude to Tuscany for his and his family's holiday," the Institute for Clinical Physiology said.
Mr Blair has come under criticism for the cost to Italian taxpayers of security surrounding his family's stay in a seaside villa near the San Rossore nature reserve, outside Pisa.