Anybody spotted a Baghdad Bounce lately? You may remember that fantastical creature. It was supposed to emerge on polling day last year as a grateful nation recorded its appreciation of military victory with its votes. David Blunkett claimed to have heard it last May in North Kent. Yesterday, David was refreshingly candid in admitting that the latest results left him "mortified".

Anybody spotted a Baghdad Bounce lately? You may remember that fantastical creature. It was supposed to emerge on polling day last year as a grateful nation recorded its appreciation of military victory with its votes. David Blunkett claimed to have heard it last May in North Kent. Yesterday, David was refreshingly candid in admitting that the latest results left him "mortified".

The only credible response for a Labour politician faced with such results is to put up his hands and concede they are awful. Traditionally, one of Labour's strengths has been its grassroots presence on local councils. Labour has never found itself in third place in local elections since reorganisation 30 years ago, and probably never since the days of Ramsay MacDonald. After losing Newcastle, Leeds and St Helens, we are in a position unique in modern Labour history of holding few of the councils of the great Midlands and Northern industrial cities. Nor can we suck comfort by pleading a low turnout. Thanks, partly, to our own experiment with postal ballots, the turnout in some cities was within 10 percentage points of the last general election.

It is, of course, unjust. This Labour Government has done more to deliver on the domestic priorities of the Labour heartlands than any in my lifetime. We have produced the biggest new investment in the NHS in its history and are the only major economy boosting rather than cutting spending on hospitals and schools. We have presided over an increase of two million jobs, and policies such as the New Deal have wiped unemployment off the political agenda. We have redistributed benefits and tax breaks to young families and, as a result, are on course to halving the number of children living in poverty.

It could be a winning record, if we could only get anyone to talk about it. Tony Blair has complained that Iraq has "overshadowed" Labour's domestic performance. This is a bit of an understatement. It might be more accurate to say that the Iraq débâcle has carpet-bombed Labour's reputation. It is a paradox that New Labour, which so compulsively tracks opinion polls and studies the entrails of focus groups, should have proved so stubborn in taking on the public over Iraq.

I have addressed around 4,000 people over the past month at meetings from Aberdeen to Luton, from Hay to Canterbury. It is impossible to miss the real anger of committed Labour voters that the Government they supported persisted in a war which they opposed. The anger is felt even more intensely among Muslim communities. In the build-up to the war, I once expressed, in Cabinet, my concern that the invasion of Iraq would alienate our Muslim population, and found myself roundly rebuked by a colleague for presenting Muslim citizens as a fifth-column, disloyal to the war effort. In desperation this week, the Government pleaded for support from Muslim voters on the imaginative but unconvincing grounds that most of the MPs who had voted against the war had been Labour.

The political fallout from the war goes deeper than damage to Labour's vote. It has further corroded confidence in the democratic process.

Those who opposed the war are frustrated that they could not get their voice heard, despite mounting the largest political demonstration in British history. In persevering with its own agenda on Iraq and ignoring opposition, Downing Street further undermined any sense of ownership of the political process by the British public.

Many of even those who supported the war feel cheated. They bought the case for war on the guarantee that Saddam had weapons of mass destruction and have discovered that they were sold a pup. The crisis in trust which this has triggered is not just a problem for Labour. It has deepened public mistrust of politicians in general and especially those in office.

The growing public disaffection with mainstream politics is reflected in the decline in the combined share of the vote of the two major parties this week, which is another six points down on the local elections of four years ago. Even as I write, I can hear the Conservative chairman Liam Fox reaching for his phone to complain that the entire drop is confined to the Labour vote. This is true, but it should trouble him that the worst performance by Labour in living memory did not result in any rise in the Tory share of the vote. The beneficiaries were third parties - the Liberal Democrats, the Green Party and UKIP. Britain is emerging into a more pluralist political spectrum.

One lesson is that both major political parties need to move beyond negative campaigning, which only makes sense in the zero sum game of two-party politics. Thumping our opponent in a pluralist environment simply knocks off more votes to be picked up by third parties and does nothing for our own support. Bizarrely, Labour's main message in these elections was that Michael Howard was too right-wing, which did not play to any of the powerful, positive reasons to vote Labour, and may even have reduced Tory defections to UKIP. Tony Blair has not made a single speech in the whole European election campaign giving a positive reason for supporters of the European project to vote Labour.

At least Labour's leadership is no longer in denial about the depths of public concern over Iraq. Yesterday, the airwaves were thick with comforting words from ministers for the Labour casualties of the local elections, promising that, as Iraq "comes right", public perceptions will change. I hope for the sake of its people that their optimism about Iraq is better founded this year than it was last year. But I am not sure they are right to imagine that public perceptions of the misadventure can ever be turned positive. Nothing that happens from now on will change the history that the war was launched on a false prospectus, the occupation was ill prepared, and the brutality at Abu Ghraib was a disgrace to all members of the coalition.

Britain is in Iraq, and Labour is in this fix, because the Prime Minister refused to heed any warning of the risks. No one has ever been more eloquent than Tony Blair on the importance of each individual facing up to personal responsibility, and on Iraq the responsibility is all his.

The Labour high command knows it, too. Strikingly, they chose not to include Tony Blair in a single one of their election party political broadcasts. We cannot fight a general election by keeping the PM out of the campaign.

Tony Blair is entitled to credit for a transformation of British society and public services, but it will always be denied to him so long as he insists he was right and the public were wrong about joining Bush's war. I understand that Tony Blair is determined to lead Labour into the next election. If that is his intention, he must make clear there will be no more "Iraqs" if he is re-elected. This is more than a matter of clever positioning. The real problem is that, in his heart, Tony Blair remains convinced that he was right and that he should be ready to do it again.

So long as they suspect that is the case, many of the voters who have deserted Labour will not return.