Tony Blair told the European Parliament this morning that Europe risks "failure, and failure on a grand strategic scale" unless it undertakes significant reform.

The Prime Minister was addressing MEPs in Brussels at the beginning of a debate on Britain's presidency of the EU. He called himself "a passionate pro-European", in a speech met mainly with generous applause.

Seizing on the recent rejections of the EU constitution in France and the Netherlands, the Prime Minister said that the EU was out of step with its citizens and needed to change.

"It is a time to recognise that only by change will Europe recover its strength, its relevance, its idealism and therefore its support amongst the people. And as ever, the people are ahead of the politicians," he said.

"We have to renew and there is no shame in that. All institutions must do it and we can, but only if we re-marry the European ideals we believe in with the modern world we live in."

Mr Blair spoke hours after the Chancellor, Gordon Brown, told City leaders in his annual Mansion House speech that Europe must "get real" and submit to radical economic reform.

In a section of his speech that seemed sharply directed against President Jacques Chirac of France, he diagnosed the EU's problems as a crisis of political leadership rather than a more fundamental problem with the nature of the union. Mr Blair was keen to emphasise his faith in the "political project" of the EU and its ability to reform.

"I am a passionate pro-European. I always have been," said the Prime Minister to a mixture of applause and a few jeers. "This is a union of values, of solidarity between nations and people, of not just a common market in which we trade but a common political space in which we live as citizens.

"The issue is not between a free market Europe and a social Europe, between those who want to retreat to a common market and those who believe in Europe as a political project.

"This is not just a misrepresentation. It is to intimidate those who want change in Europe by representing the desire for change as betrayal of the European ideal, to try to shut off serious debate about Europe’s future by claiming that the very insistence on debate is to embrace the anti-Europe."

Mr Blair repeated his position on EU budget reform - dubbed "pathetic" by M Chirac at the EU summit last week. But Mr Blair reminded MEPs that he was the only British Prime Minister to ever consider negotiating the British rebate, and that he never suggested that EU farm subsidies should be redrawn overnight.

To applause, he said that action must be taken to update an EU economic policy that still spends 40 per cent of its budget on the Common Agricultural Policy and has left 20 million Europeans unemployed.

The Prime Minister said that Britain's presidency of the EU would also tackle issues such as cross-border crime, illegal immigration, the proposed EU membership of Turkey and Croatia and the furthering of EU defence policy. He said that the EU must continue to expand - another idea that is being resisted by France.

He closed his speech as he began it, calling for reform and saying that Britain would present its views while listening to other member states.

"Only one thing I ask: don’t let us kid ourselves that this debate is unnecessary, that if only we assume business as usual people will sooner or later relent and acquiesce in Europe as it is, not as they want it to be."

"The people of Europe are speaking to us. They are posing the questions. They are wanting our leadership. It is time we gave it to them."

Philip Webster, Political Editor of The Times, said that Mr Blair's conciliatory message - a mixture of his faith in the EU and an insistence on major reform - was well received.

"After the speech, Barroso (president of the European Commission) welcomed the message that Blair believes in Europe as a political project rather than just an economic one. And I think that went down very well with the MEPs," he said.

Mr Blair stayed after his speech to take part in a debate on Britain's presidency of the EU, answering questions from MEPs from across Europe.

The most colourful reaction to the Prime Minister's speech came from Daniel Cohn-Bendit, co-president of the Green MEPs and the leader of the student uprisings in Paris in 1968. Mr Cohn-Bendit asked: "You want to change Europe? Welcome to the club, Tony Blair."

Mr Cohn-Bendit challenged Mr Blair to deliver on his rhetoric: "The gauntlet has been thrown down. Mr Blair, you must stop being a prime minister for the next six months - you have to be a minister with a vision for Europe and its environmental, social and economic problems."

Although there was no immediate reaction from either France or Germany, Mr Blair's speech received a warm welcome from Poland, the largest of the 10 countries who joined the EU last year.

"I really like this vision because Europe today needs to take a fresh look (at itself) and to adapt better to the challenges of the contemporary world," said Adam Rotfeld, the Polish foreign minister.

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