The former PM appealed to European leaders to prepare the ground for Britain to stay IN the bloc.
He predicted the UK would end up asking for an extension to Article 50 – meaning we don't leave on March 29 as planned.
Mr Blair said Britain could then use that time to reopen talks with the EU or call a second referendum.
He said in a speech: "Europe should prepare for the possibility, now morphing into the near-probability, that Britain will require an extension of time to the Article 50 process, either to negotiate further or more likely to conduct a new referendum.
"We are now entering a new phase of Brexit. Government has lost the initiative. Parliament has taken it.
"We know the options for Brexit. Parliament will have to decide on one of them. If Parliament can't then it should decide to go back to the people."
He claimed a second referendum would be the best way to break the Commons deadlock which has followed Theresa May publishing her deal.
Mr Blair added: "My advice to her is there's no point literally in carrying on banging your head against this brick wall. It's sensible to take your head off the brick wall and think creatively."
Labour have said they could back a second referendum if they fail to bring down Mrs May's Government.
But Corbyn ally Angela Rayner warned last night that a rerun of the vote could destroy faith in democracy.
The Shadow Education Secretary told the BBC's Question Time: "Saying that we'll just have a second referendum and everything will be fine, I think, is a very serious position and it undermines democracy in itself.
"People made the decision and you can't keep going back saying: Would you like to answer it a different way?"
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