At Commons question time, Mr Blair hailed Mr Blunkett as "a decent and honourable man" who had contributed a great deal to his country and overcome daunting personal challenges.
But Tory leader Michael Howard branded Mr Blair a "lame duck" Prime Minister and said that this week had seen the "seepage of his authority turn into a haemorrhage".
Mr Blair and Mr Howard faced each other across the despatch box shortly after MrBlunkett announced his resignation from the Cabinet for the second time in lessthan a year.
Before taking questions, the Prime Minister paid his own personal tribute to his departing colleague and insisted he could find no grounds to dismiss him.
"I would like to say that whatever mistakes he has made, I've always believed and believe now that he is a decent and honourable man, who has contributed a great deal to his country, who has overcome immense challenges that frankly would have daunted the rest of us.
"He can be proud of his record in British public life," he added to Labour murmurs of support.
Mr Howard said: "This has been an extraordinary week for the Government andyou. We have seen the slow seepage of your authority turn into a haemorrhage.
"We all acknowledge the honourable way in which Mr Blunkett has decided to resign and I pay tribute to him for that.
"But the key question now is for you. Do you think that in your handling of this affair, your judgment has been at fault in any way?"
Mr Blair replied: "Let me tell you exactly why I did not believe the allegations made against him warranted his dismissal.
"Perhaps with the frenzy that is going on around this it is just as well for the House and members of the public for me to explain why not.
"There were basically three sets of allegations and perhaps I can be allowed to detail my reasons why I decided not to dismiss him."
Mr Blair said the first allegation was "that he had not sought the advice ofthe independent advisory committee, which he should have done.
"That is a breach of the ministerial code, it is true. I did not believe it warranted dismissal for these reasons.
"First of all, I could discover no impropriety or wrong doing in his doing that," he said to Tory jeers.
"Secondly, he had actually registered these jobs with the register of Members' interests.
"It arose out of a misunderstanding on the correspondence, which I looked at myself and believe was an honest misunderstanding on his part.
"And it was clear to me that even had he been in touch with the advisory committee, as he accepts he should have done, the most that would have happened is that in respect of one of those jobs, his taking up of that job would have been delayed by a few weeks.
"In those circumstances, I did not believe it warranted his dismissal.
"The second set of allegations was in respect of the register of shareholdings in DNA Bioscience. He was supposed to follow a particular procedure for ministers when they come into government. He followed that procedure completely. Therefore I could find no breach of the ministerial code in respect of that.
"The third and most serious allegations that were made by the shadow leader of the House (Chris Grayling) was that he had had discussions whilst a member of the Government and made representations on behalf of his firm that either had a contract or was trying to get a contract from the Department of Work and Pensions.
"Had that allegation been true it would most certainly have been a dismissable offence. I looked into that allegation. I found it to be completely untrue.
"Therefore it would not have been right in these circumstances for him to resign. That is why I did not dismiss him under the ministerial code."
Mr Howard said: "Mr Blunkett has resigned and I don't intend to pursue thosematters this afternoon.
"I quite understand why your judgment in these last few days has been awry.
"I can sympathise with your desire to cling on to Mr Blunkett. Isn't it a fact that he was one of your last remaining allies in the Cabinet?"
Mr Blair denied this, saying: "Mr Blunkett resigned for the reasons he gave - that it became impossible for him, frankly, with the frenzy surrounding him and his job, for him to carry on doing that job properly.
"The reason I outlined to you the specific allegations is because I think in fairness to him people should understand that a lot of what has been written about him in the past few days has, on my investigation of the facts, turned out to be completely untrue.
"However, having said that, for the reasons that he has given, he has resigned.
"I would simply put this to the House that sometimes in these occasions, the degree of pressure, to which people are subject, is absolutely extraordinary.
"I think we should just occasionally reflect on that.
"And when it is from somebody that has done an immense amount for this country, I think as he goes from government, we should say he goes, in my view, with no stain of impropriety against him whatever."
Mr Howard warned: "If you recalled some of the words you used in Opposition, you might have found it rather difficult to repeat the words you have just uttered.
"I shall resist the temptation to ask you to name your remaining allies in Cabinet."
Mr Howard told the Prime Minister that this week marked "the beginning of thefinal chapter of your administration.
"Will you be the last person to recognise that with the departure of the key ally there is no longer any doubt that the sole source of authority in your cabinet is the Chancellor of the Exchequer?
"For how long will the country have to put up with this lame duck Prime Minister in office but not in power?"
Liberal Democrat leader Charles Kennedy demanded a change in the ministerialcode of conduct, to make the committee's advice on taking up posts binding.
"It does surely seem rather absurd that an ex-minister is obliged to seek advice but is not actually obliged to take that advice.
"As a result of this experience are you, and with you the Cabinet Secretary, actually urgently addressing that issue."
Mr Blair told him it was "now pretty clear if it wasn't before that ministers are expected, when they leave office, to take the advice of the independent advisory committee.
"Obviously that's got to be very clear; it certainly is very clear now I would say."
Mr Kennedy insisted that it was a "ridiculous state of affairs" that having sought that advice it could then be ignored.