The ex-premier said Labour was "in the same position as the Tories" on Brexit but if the party came out in opposition to leaving the European Union it would not only "be saying what's right" but would also expose the divisions within the Conservative ranks.
Mr Blair said he believed that "stopping Brexit is the route to win power" for Labour and rejected the suggestion that accepting the result of the referendum was necessary to avoid the risk of losing support in former industrial heartlands.
Asked in the Guardian whether he agreed support for Brexit was a sacrifice worth making to win, he said: "I don't actually. No. I think this principle's too important."
He added: "I'd like to see a Labour government in power. But I think the key national priority right now is stopping Brexit. I would put it above everything else right now for the country."
Mr Blair said he understood the "very pragmatic position" that Labour had taken to avoid being painted as the anti-Brexit party, but it was putting them in the same position as the Conservatives - arguing to leave the EU but retain close trade links.
It was also stopping Labour from focusing on the "destructive impact" of Brexit and the distraction the "Tory psychodrama" was having from the business of improving public services and the economy.
He acknowledged Labour would have a "huge fight" if it came out in opposition to the referendum result "but you'd be fighting from a point of principle".
"Think of what a galvanising movement you would have in those circumstances, because you would actually be - well, for a start you'd be saying what's right. That's quite an important thing to start with.
"Secondly, I think the impact on the Tories would be really profound, because you'd be driving a wedge right into that Tory division - and the Tories are a profoundly divided party."
Mr Blair said Mr Corbyn had a "genuine personal charm" which he admired but warned that at the next general election Labour would not face the same "incompetent" Tory campaign.
The former prime minister and the current Labour leader have traded blows throughout their careers, but Mr Blair said: "I think what he does have is a genuine personal charm. I'll give him that.
"You know, when the right-wing media were trying to build him into some sort of demented Marxist, I think his demeanour was of enormous assistance.
"I pay tribute to that, I genuinely do. I mean, I actually admire that."
But Theresa May's election campaign was "more incompetent than any I've ever seen ... And I don't think the same rules will necessarily apply in the next election."