Mr Mandelson, who despite his exile from the top echelons of power is still thought to have the ear of Mr Blair and some key members of New Labour's inner clique, said his support for regional devolution was "something of a conversion".
His comments about a wealth gap contrast with the government's insistence that differences in prosperity within regions are as big as those between them.
In what he admitted was a conversion in his own views, Mr Mandelson said the time had come for the north east to "take its destiny in its own hands".
He argued for Labour's general election manifesto to include plans to allow referenda on setting up regional authorities with small executives and first ministers.
Tony Blair sparked heated debate in December 1999 when he used research to argue the concept of a north-south divide was oversimplified.
Performance gap
Mr Mandelson said at Hartlepool College on Friday: "Some argue that there is no longer a regional problem in the UK - only a problem with areas of greater economic and social difficulties within regions.
"Certainly there are sharp differences in performance between communities within the north east region.
"But the statistics show that a large peformance gap between regions remains.
"London and the south east is the richest region in the European Union - admittedly with its own pockets of poverty and social exclusion - but in every other part of the United Kingdom standards of living are below the European average."
Mr Mandelson, who despite his exile from the top echelons of power is still thought to have the ear of Mr Blair and some key members of New Labour's inner clique, said his support for regional devolution was "something of a conversion".
"We cannot achieve economic revitalisation in the north east without modernising the means of delivering our economic policies, and this means renewing the region's political institutions," he argued.
Mr Mandelson suggested top-down departmental initiatives, which were often disparate, and regional development agencies, could only be part of the solution.
He described a referendum on creating a regional authority for the north east, elected by proportional representation as a "unique window of opportunity".
Widespread roles
"A regional authority, as I envisage such a body is a strategist, galvaniser, advocate and manager rolled into one," he said.
The authorities should include appointed business leaders, trade unionists and educationalists and could nominate a small executive and first minister.
Michael Davy, chairman of the current North East Regional Assembly, said he was delighted a national figure had "joined the club".
"A directly elected regional assembly, we believe, would bring regional cohesion," he told BBC News.
Mr Davy argued such authorities could only be created in those areas of England that had a clear regional identity and culture.