Long-time Labour backbencher Brian Sedgemore has defected to the Lib Dems.
Mr Sedgemore is not standing at the election
Mr Sedgemore, who spent 27 years as a Labour MP, accused Tony Blair of "stomach turning lies".
He said he wanted to give the Labour leader a "bloody nose" at the polls but Mr Blair argued voters were interested in policies.
"They aren't particularly interested in someone they have never heard of who's not even standing as a candidate at the general election," said Mr Blair.
Labour tried to shrug off the defection and concentrate on education but Conservative leader Michael Howard has again argued the election is about "character" .
A new Tory campaign poster features a picture of Mr Blair with the slogan: "If he's prepared to lie to take us to war, he's prepared to lie to win an election."
Mr Sedgemore, like the Lib Dems, voted against the government over the Iraq war, anti-terror laws, top-up fees and foundation hospitals.
He claimed other Labour MPs from the last Parliament were planning to leave the party, though not join the Lib Dems. He refused to give any names.
A number of his fellow Labour rebels have criticised his defection.
But Mr Sedgemore accused Mr Blair of ditching key liberal principles, saying plans to allow house arrest for terror suspects had been the final straw.
"I urge everyone from the centre and left of British politics to give Blair a bloody nose at the election and to vote for the Lib Dems in recognition of the fact that the tawdry New Labour project is dead," he said.
"The Tories have no chance of winning the election so the bogeyman Howard argument is just an Aunt Sally, easily put up and more easily knocked down."
Labour has warned people moving to the Lib Dems they could let the Conservatives "walk in through the back door".
Mr Sedgemore was first elected to the Commons in February 1974, to represent Luton West.
He lost his seat in 1979 but returned in 1983 as MP for Hackney South and Shoreditch.
Mr Kennedy said Mr Sedgemore had given a strong message that the Lib Dems were the only party to take "principled stands" on Iraq, tuition fees and civil liberties.
Asked if the defection showed the Lib Dems were the left-wing voting option, Mr Kennedy said his party had stuck by its principles while others had moved.
Deputy Labour leader John Prescott, in Gloucester, was dismissive, saying: "Whoever heard of Brian before?"
Giving matrons more power in the MRSA fight is on the Tory agenda
But Labour candidate Bob Marshall-Andrews said Mr Sedgemore was "microcosmic" for the "significant raft of Labour voters who have developed a very strong aversion to the prime minister".
Mr Blair and Education Secretary Ruth Kelly visited a south London school to highlight plans to increase spending per pupil to £5,500 by 2008, up from £2,500 in 1997.
The Labour leader said he wanted quality education for all while the Conservatives wanted it only for those at the top.
The Tories instead argue they want to offer more school choice to all parents.
They highlighted their plans to tackle MRSA by increasing the power of hospital matrons.
Mr Howard said a £10m plan to tackle superbugs would include new nasal swab tests in all NHS hospital trusts to identify MRSA in hours, not days.
With nine days until polling day, Tuesday is the deadline for applying for postal votes.
A BBC survey has found at least 5m will be sent out, compared with 1.7m in 2001.
Mr Howard on Monday night insisted his party could still win the election.
He told ITV's Ballot Box Jury: "You often find if you are a football fan there is a team that might be two goals down at half-time, (but) they win the game."
Labour election chief Alan Milburn claimed the Tories were trying to suggest they were losing when the election was actually close in marginal seats.