Tony Blair has called on party activists to "hold firm" in the face of poor performances at the polls.
He told Labour's National Policy Forum that the party must go through a period of "renewal" of its policies to face future challenges.
The prime minister also conceded Labour's third term in government had been "rocky" and was "new territory" for the party.
Labour suffered a double setback in two by-elections on Thursday.
It was pushed into fourth place at Bromley and Chislehurst and failed to regain a Labour stronghold in south Wales.
Independent Dai Davies won the Blaenau Gwent seat, which Labour lost in 2005 to Independent Peter Law when he overturned its 19,000 majority.
Meanwhile, the Tories held Bromley and Chislehurst, in south-east England, but their 2005 majority was slashed from 13,342 votes to 633 by the Liberal Democrats. Labour came fourth behind the UK Independence Party.
Mr Blair returned to a theme of renewal in an attempt to regain the initiative within his party.
At the meeting in London, he said: "This is the time to hold firm, to make the right decisions for the country, no matter how difficult; to face up to the tough challenges no matter how daunting."
"I want a party debate about our future that is open, free-flowing and genuinely about where we go next on policy."
"New ideas won't be about reworking old ideas, but by saying 'What are the future challenges and what is a hard-headed modern way of ensuring they are met on a fair and equitable basis?'."
Mr Blair also called on activists to have "self belief" and confidence in Labour's record three terms in government.
"Why have we won three terms? Because at the core of our project to govern has been an idea completely in tune with the modern age in which we live," he said.
"It is the union of individual aspiration and social compassion, the belief that prosperity is not contrary to a society that is just and opens up opportunity to all, but dependent on it."
Mr Blair also used the speech as an opportunity to attack the Tories and the Liberal Democrats for having no policies.
"There is no big idea coming back at us from the Tories, only an ersatz version of our own idea. The Lib Dems may do well in by-election but in reality underneath they are in a kind of nervous breakdown, utterly uncertain whether to go left, right or centre."