David Cameron has denied betraying Conservative principles with the changes he is making to the party.
He said in a speech to the left-wing think-tank Demos that Tories had won "the battle of ideas" and were not facing the challenges of the 1970s.
Tony Blair had known what people wanted in the 1990s, he said, and he saw his task as "preserving the fruits of the Thatcher revolution".
However, New Labour had failed to deliver on its promises, he said.
He blamed Chancellor Gordon Brown - widely seen as Mr Blair's likely successor - for increasing bureaucracy.
Mr Cameron said Conservatives should focus on a vibrant economy, decent society but also have "happiness, quality of life and environmental sustainability as central goals".
Mr Blair's triumph had been to focus on social justice and economic efficiency, but Labour had failed because it had introduced "legislation, regulation and bureaucracy".
"Wherever they have seen a problem, they have seen action by the state as the solution," he said, adding that it was the "natural instinct" of Mr Brown.
The issues Mr Blair focused on - a stronger economy and more decent society - were now the "common ground of British politics".
"His aims were not markedly different to Mrs Thatcher's aims, or John Major's aims, but they were new for Labour. The new bit of New Labour was the equivalence granted to economic efficiency," said Mr Cameron.
"The principal task for us is now clear," he said.
"We have to find the means of succeeding where the government has failed."
Mr Cameron argued that Labour's move towards what had traditionally been Tory ground had devastated the Conservatives.
"There was in truth nothing fundamentally new about the New Labour analysis except that the party offering it was Labour."
He said: "We made some terrible strategic and tactical mistakes."
This involved focusing too much on areas where the parties did still differ - tax, immigration and Europe - despite successive leaders recognising the need to avoid being seen to be extreme, he said.
"Embracing a 'new politics' and accepting that in many areas New Labour was closer to the Conservative Party was a difficult thing to do. But nevertheless it was the right thing to do."
However, former Conservative Party chairman Lord Tebbit warned against moving towards the "morass" of the political centre ground.
He told BBC Radio 4's Today programme: "If all the parties mill around in the centre ground and the elector feels that it doesn't matter which one he votes for, it will not make a lot of difference. He will probably stay at home."