The news will infuriate Liberal Democrat activists and threatens to overshadow Mr Kennedy's first party conference as leader, which starts today.
In their first meeting 10 days ago, the Prime Minister held out the lifeline of voting reform for local government elections in England and Wales. He has now been persuaded of the case for introducing PR at a local level as part of a shake-up of councils and in order to reduce the power of Labour left-wingers.
But that will not be enough to appease Liberal Democrat party members who are already angry about co-operation with Labour. Delegates at the conference in Harrogate plan to demand that the newly elected leader ends the formal links with the Government, which were set up by his predecessor Paddy Ashdown, because they say the Prime Minister has "broken his promise" over PR.
Mr Kennedy has indicated to Mr Blair that he is unwilling to extend the remit of the joint Labour and Liberal Democrat cabinet committee. However, the Liberal Democrat leader intends to continue talks with the Prime Minister and the two men will meet again after the party conference season for a more formal discussion. Mr Kennedy is now also prepared to take a conciliatory approach to proportional representation - a decision which will further infuriate the grassroots who see voting reform as a holy grail. "He thinks that there is no point holding a referendum unless you can win it," a spokesman said.
Like Mr Ashdown, the Liberal Democrat leader is treading a fine line between co-operating with Labour and criticising the Government. He plans to woo Labour's disillusioned core voters by stepping up his attacks on Mr Blair in particular by accusing ministers of failing to tackle poverty and urban deprivation and of neglecting the public services. "This is Labour's exposed flank," one aide said.
However, this approach has already been called into question by an internal Liberal Democrat strategy paper telling the new leader that he must target Conservative voters at the next general election. Party strategists have identified around 40 Tory seats which pollsters believe should be top of Mr Kennedy's "hit list".
The new leader plans to promote himself this week as an "ordinary man of the people" - unlike other politicians who he says are obsessed with Westminster politics. He is also drawing up plans to sack almost half his front bench in a reshuffle after the conference.Reuse content