Mr Cameron, in his first comments on Europe since becoming Tory leader, attacked Mr Blair for giving up part of the rebate on Britain's contributions to the European Union without securing his original aim of winning cuts in farm spending.
The two leaders clashed when the Prime Minister made a Commons statement on last week's EU summit in Brussels, where he traded a £7bn cut in the British rebate over seven years for a review of all EU spending including the CAP in 2008.
Mr Cameron said Mr Blair had failed on the three objectives he had set himself on the EU budget: to limit its size, ensure fundamental reform of the CAP, and keep the rebate unless there was reform. He asked him: " Why did you give up £7 billion for next to nothing? How is the Chancellor going to pay for it: more taxes, more borrowing or cuts in spending? Which is it?"
The Tory leader's attack appeared to stall as Mr Blair challenged him to support the EU's decision to switch resources from richer nations, including Britain, to the new members in central and eastern Europe who joined last year. He said it would therefore have been "a betrayal of everything Britain has rightly stood for" if agreement had not been reached.
Mr Blair told Mr Cameron: "You support enlargement, right? Yes? You support wealthy countries paying for the poorer countries? That is right, isn't it? But you don't support Britain paying any money for it.
"You are in favour of enlargement but refuse to follow it through. The consequences of that position is that you are not exercising leadership. You are abdicating leadership."
Mr Blair declared that Euroscepticism was "alive and well" in the Conservative Party despite Mr Cameron's attempt to portray a more moderate image. He urged Mr Cameron to think again about his plan to withdraw Tory MEPs from the main centre-right grouping in the European Parliament, the EPP-ED, which would be a "disaster" for Britain's ability to secure a good deal in Europe. He said the Tories would find themselves alongside Jean-Marie Le Pen, leader of the French National Front, Alessandra Mussolini, a far-right Italian MEP, and Robert Kilroy-Silk. He told the Tory leader: "Before you start criticising my leadership in the EU, start exercising some yourself."
Edward Macmillan-Scott, former leader of Conservative MEPs and a vice-president of the European Parliament, ridiculed the idea that the Tories could form a powerful new grouping yesterday. He said the only common factors of the Tories' potential new partners were their Euroscepticism and unpopularity.
In a letter to Mr Cameron, Mr Macmillan-Scott said: "As you plot a welcome new centre course for Conservatism, the EPP parties are your political allies across the continent. We should lead the EPP-ED - not leave. "
Jose Manuel Barroso, president of the European Commission, gave Mr Blair valuable support by pledging that he would launch a review "without taboos" of all EU spending in 2008.
Mr Barroso called for a new system of financing the EU, arguing that the six-month row over the budget had been "very negative in terms of the atmosphere of the member states".
In comments which will be less welcome in Downing Street, Mr Barroso also described the EU spending totals agreed by Mr Blair in the early hours of Saturday morning as being "very close to the Luxembourg presidency proposals" that the UK rejected in June.Reuse content