The prime minister has defended plans for keeping terror suspects under house arrest, insisting the measure was indicative of "extreme circumstances".
Mr Blair and Mr Howard will meet to discuss Tory proposals
Tony Blair said he was trying hard to strike a balance between protecting national security and civil liberties.
He was being challenged by both Tory and Lib Dem leaders in the Commons over plans for new "control orders" which include home detention.
Mr Blair agreed to meet Michael Howard to discuss alternative Tory proposals.
The government proposed the "control order" idea and a range of other new powers, including tagging of terror suspects and curfews, after the law lords said current detentions without trial broke human rights laws.
At prime minister's questions, Mr Howard urged the use of phone tap evidence in prosecutions - ruled out by the government - as a way of bringing more suspects to trial.
Mr Blair agreed to a meeting with Mr Howard to discuss the Tory proposals, but he warned the use of intercept evidence could compromise sources of intelligence.
"Any such powers should only be undertaken with the greatest of hesitation and only in circumstances that demand it," he said.
He said the security services must be allowed to do their job, adding: "Nothing must stand in the way of protecting the security of our people."
Mr Howard replied that "of course we must fight terrorism," but added that there were "even greater difficulties with detention without trial".
"It is of the utmost importance that in doing what is necessary to protect life we don't lose sight of the need to protect our way of life," he said.
Mr Blair said he was desperate to avoid a situation where in the future people say "we could have averted a terrorist attack".
The Lib Dems also urged the use of intercept evidence, for judges to prepare sensitive cases and jury selection to guarantee any security concerns were met.
Leader Charles Kennedy said a new offence of "acting towards planning acts of terrorism" should be created - a move rejected by Mr Blair as unworkable.
Mr Kennedy said if a prosecution was impossible, new control orders should only be issued "by a judge, not by a politician".
Mr Blair replied that only "in the most extreme circumstances" should citizens' rights be curtailed.
The prime minister's spokesman said of Mr Blair and Mr Howard's meeting: "It's right to have a discussion on those ideas because it's better to have a consensus."
The controversy over the issue continues after a foreign terror suspect held in the UK without trial or charge since December 2001 was freed from jail.
Home Secretary Charles Clarke said there was not enough evidence to keep the Egyptian man, known only as C, certified as a terrorist suspect.
On Monday, the legal team for two Algerian suspects being held without trial told a court the men did not want bail if it meant being put under house arrest.
Most of the terror suspects are detained at Belmarsh Prison in London.