Mr Blair said the party he used to lead should aspire to govern, rather than be a "fringe protest movement".
He has been a vocal critic of leader Jeremy Corbyn, warning before his leadership election victory that the party risked "annihilation" if he won.
Mr Corbyn's office declined to respond to Mr Blair's comments, made in a Spectator article.
"All wings of the Labour Party which support the notion of the Labour Party as a Party aspiring to govern, rather than as a fringe protest movement agree on the tragedy of the Labour Party's current position," he said in the article, which does not mention Mr Corbyn by name.
His comments come amid divisions within the party over its future direction. Most Labour MPs did not back Mr Corbyn for leader, but he overwhelmingly won the contest with over half of the membership's vote.
Tensions have surfaced since the Commons voted on air strikes in Syria. Some MPs have complained they were abused online after backing military intervention, and Mr Corbyn has warned members "abuse and intimidation" will not be tolerated.
There have also been claims so-called moderate Labour MPs could be unseated by pressure from the grass-roots Momentum group, formed from Mr Corbyn's leadership campaign, which the group denies.
In his article, Mr Blair also defended his party's record under his leadership, during which he said it had "effectively discarded" its ideological commitment to socialism.
Labour "fell short" in areas when hard choices had to be made, he said, with "significant elements" of the party unhappy with the "compromise" and "pragmatism" required for government, seeing it as a betrayal of Labour's principles.
Looking forward, Mr Blair said "more modernising and less ideological thinking" was needed to cope with challenges such as the housing shortage and social exclusion.
"Right now we're in danger of not asking the right questions, never mind failing to get the right answers," he said.
Many current Labour members feel the party "lost its way"  in government, Mr Blair concluded.
"I feel we found it," he said.
"But I accept in the process we failed to convince enough people that the true progressives are always the modernisers, not because they discard principle but because they have the courage to adhere to it when confronted with reality."

The body of Louis Thornton, 26, who played for Douglas-based Corinthians, was discovered at 05:20 BST on Saturday in his hotel room in James Street.
Club treasurer Steve Corran said Mr Thornton, who had been on Merseyside to watch his beloved Middlesbrough play Everton, was a "big character" and a "leader, both on and off the pitch".
Mr Thornton's death is not being treated as suspicious.
In a statement, Corinthians said everyone was welcome at the club to pay their own tributes.
Mr Corran said: "We would like people to come and visit the pitch where our Louis scored great goals, scruffy goals, put in crunching tackles, but most of all has given his family, team-mates, managers and fans so many memorable moments."
Mr Thornton worked for an accountancy business in Douglas.
Mr Corran, who was also his boss at work, said: "He worked hard and gave 100% in everything he did on and off the pitch."
The current state of the Labour Party is a "tragedy", former Prime Minister Tony Blair has said.
[NEXT_CONCEPT]
The captain of a Manx football club has been found dead at a Liverpool hotel.