Yesterday Mr Blair sought to turn the debacle to his advantage by unveiling plans for wide-ranging reform of the European Commission.
Allies insisted that he now had a golden opportunity to persuade other EU countries to force "complacent" member states, led by France, to accept radical reforms.
Privately, however, pro-EU ministers were gloomy. "It is a significant setback," said one. "We thought we had killed off the main bogeyman when Oskar Lafontaine [the German Finance Minister] resigned. Now the sceptics have found another one in the Commission." Some ministers even predicted that Mr Blair would be forced to delay the referendum he had planned to call after the next general election.
In an emergency Commons statement, Mr Blair agreed that "Europhobes" could exploit the crisis, but insisted that it was an "opportunity to push through root-and-branch reform of the Commission."
Last night he submitted a paper on Britain's plans to shake up the Commission to Gerhard Schroder, the German Chancellor, when they held talks in Downing Street.
The sweeping changes proposed include:
A new contract between the Brussels Commission and the European Council - the heads of government of the 15 EU member states.
Setting up an independent investigation office to probe fraud and financial irregularities.
An overhaul of the commission's auditing procedures, financial management, spending plans and awarding of contracts.
Commission officials to be fully accountable for their budgets and programmes.
A new disciplinary procedure for staff who fall short of expectations.
Mr Blair also endorsed the reforms proposed by the Brussels inquiry report, which he said had "revealed a sad catalogue of negligence and mismanagement". But he reacted coolly to demands for the European Parliament to be given greater powers to hold the Brussels bureaucracy to account.
He called for Jacques Santer, the Commission President, to leave "as soon as reasonably and practically possible".
Cabinet sources said the new president would have to be fully committed to reform. "We need a new broom for the project to have credibility," said an insider.
Mr Blair said that Mr Santer was by no means solely responsible for the problems, and he pointed the finger of blame at John Major, the former prime minister, who played a crucial role in securing Mr Santer's appointment by vetoing moves to install Jean-Luc Dehaene, the Belgian Prime Minister.
Mr Blair called for an end to the "horse-trading" which resulted in the outsider Mr Santer getting the job five years ago. "The top jobs should go to the top people. Merit and merit alone should decide," he said.
The Tories were buoyed by the controversy, which could boost their prospects in the elections for the European Parliament in June.
The Opposition criticised Mr Blair for failing to learn a key lesson from the Brussels inquiry. "The EU tries to do too much and interferes too often. It should be doing less, and doing it better," said William Hague, the Tory leader.