Mr Blunkett told a London conference that the Government was inviting bids for projects ranging from better school attendance registration to more work experience for 14-year-olds.
A recent Audit Commission report showed that 65 per cent of school-age offenders sentenced in court had also been excluded from school or were persistent truants.
Nearly 1 million pupils have missed at least one half-day school session without permission or a note from their parents.
Mr Blunkett said at the conference, organised by the National Union of Teachers and the Times Educational Supplement that the Government was offering pounds 21m to:
help local authorities and schools tackle truancy;
reduce exclusions from school and improve provision for excluded pupils;
bring disaffected 14- to 16-year-olds back to learning.
A further pounds 2m will be available to give pupils more work experience.
Examples might include better ways of monitoring school attendance, more opportunity to spend time in local firms and colleges, and a chance for pupils at risk of exclusion to spend part of the week in a pupil referral unit.
Exclusions have risen sharply over the last three years and around 13,000 pupils are believed to have been permanently excluded from school last year.
There are now 3,859 pupils in pupil referral units, up from 2,107 in 1995.
Mr Blunkett said : "I believe education lies at the heart of our programme to combat social exclusion.
"Truanting from school affects not only pupils' chances of future success but also has an impact on the wider community, as does exclusion.
"Disaffection from school costs us dear. It costs the community in terms of the disruption which young people on the streets can create and there is a cost in terms of blighted prospects for the individual pupil who may fail to pick up any qualifications," he added.
"The cost to the taxpayer of dealing with the consequences of failure is enormous compared to the cost of investment in preventing exclusion and truancy."
The Government will issue new guidance to all schools on attendance, how to combat truancy and emphasising parents' responsibility.
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