Lib Dem home affairs spokesman Mark Oaten said David Blunkett had created "an atmosphere where hatred of asylum seekers is commonplace".
Mark Oaten would create immigration quotas
Mr Oaten made the claim as he unveiled plans to remove the asylum system from control of the home secretary.
An asylum agency would consider claims free from political interference and asylum seekers would be allowed to work after two months, under the plans.
On immigration, quotas would be set for foreign workers allowed into the UK.
A US-style "green card" system would enable recruitment in industries where positions cannot be filled by UK nationals.
This would be based on a sector by sector breakdown of the number of migrant workers required, compiled with the assistance of the unions, Confederation of British Industry and the public and private sectors.
The Lib Dems would also ensure that asylum is kept separate from immigration and honour Britain's asylum obligations by safeguarding the "scope and interpretation" of the 1951 UN Convention on Refugees.
Announcing the asylum policy at his party's conference in Bournemouth Mr Oaten said: "The home office is not fit to have day-to-day responsibility for asylum.
"We need a system with better initial decision making to produce efficient and fair results."
The government accepts immigration quotas from a handful of industries, such as IT and agriculture, but the onus is currently on business to make the case.