The memo claims the party is seen as riven by "internal conflicts"
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Downing Street has denied any connection with an internal memo suggesting the government has lost its grip and is seen as a "shambles".
The Mail on Sunday claims the document was prepared for the prime minister by senior aides.
It suggests Labour should either unite behind Gordon Brown or pick a much younger new leader.
Deputy Prime Minister John Prescott dismissed the memo as the work of a "teenybopper" not a significant figure.
Mr Blair's spokesman said: "This is not a Downing Street memo."
He added: "It was not written by any of the prime minister's staff and it most certainly does not reflect his views."
Disaster
Meanwhile, speaking on the BBC's Sunday AM programme, Mr Prescott added: "It's been emphatically denied by Number 10 that it is anybody in Number 10.
"I can't be sure that it might not be a teenybopper on the side giving some kind of information and advice."
The document allegedly expresses concern that the party is viewed as riven by "internal conflicts" and lacking "grip and competence on vital issues".
And it is said to insist that the party is running out of time to avoid electoral disaster.
Downing Street sources also insisted that the memo had not been prepared by any of the prime minister's special advisers or other Labour Party-funded staff in his personal office.
'Internal conflicts'
The memo, leaked to the Mail on Sunday, says Labour's only hope of recovery may be to abandon Mr Brown and "move to a new generation" by picking a younger leader.
But it also warns of the dangers of being '"disloyal" to the "greatly respected" Chancellor.
It goes on to say the public believes Labour is riven by "internal conflicts" and shows a "lack of grip and competence on key issues" such as Iraq, the NHS and immigration.
The memo, which the newspaper claims was written in the past few weeks, also contradicts Mr Blair's public statements dismissing Mr Cameron as a political lightweight with no hope of winning the next general election.
It says the Tories have big opinion poll leads on "tax, crime and immigration," with Labour no longer having "a measurable lead on any major issue".
It adds: "The government is seen as a shambles. It is not just Labour internal conflicts but a lack of grip and competence on key issues. Iraq is a potent and raw issue, so is the NHS, immigration and crime. We have lost control of the big issues and are not delivering."