Blair said they had a "very good discussion"
Mr Blair, who had been meeting the Palestinian leader, Yasser Arafat said he wanted to see a viable Palestinian state.
His view chimed with recent comments by US President George W Bush, but he rejected suggestions that moves to restart the peace process were designed simply to blunt Arab and Muslim anger at the air strikes in Afghanistan.
"It is important in its own right, irrespective of what happened on 11 September," he said.
Mr Arafat urged an immediate resumption of negotiations with Israel, repeating his call for an independent Palestinian state with Jerusalem as its capital that would exist alongside the Jewish state.
But Israeli Government spokesman Avi Pazner told the BBC that the Palestinians would have to do more to enforce a ceasefire and arrest Palestinian militants before any more progress could be made.
Mr Pazner told the BBC that the idea of a Palestinian state was "one of the options".
He said: "We are eager to see a resumption of negotiations, but we have to see first that the ceasefire is holding on the ground.
"We will not start negotiations under fire."
Israel accused
Mr Arafat's visit comes amid conflicting signals on the ground in the Middle East, with Israel pulling troops back from Palestinian-controlled areas in the divided city of Hebron, but also resuming its policy of killing suspected militants.
Palestinians on Monday accused Israel of killing a militant in a car bombing in the West Bank town of Nablus, the second member of the hardline Islamic group Hamas to be killed in 24 hours.
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Mr Arafat's visit to London has angered many Israelis.
Zalman Shoval, a senior foreign policy adviser to Mr Sharon, told the Today programme Mr Blair knew Mr Arafat was an "unrepentant terrorist".
"Even if he changes his tune at this time, it is not because he has changed his views about Israel but because he wants to be in the good grace of America and the west in general."
Mr Arafat was also meeting Mr Straw and the Archbishop of Canterbury, Dr George Carey on Monday, and holding talks with Liberal Democrat leader Charles Kennedy.
Later, he will visit Dublin to discuss the situation in the Middle East with Irish Prime Minister Bertie Ahern.
It is possible that Mr Blair will stage a similar meeting with Mr Sharon early next month, when the Israeli prime minister is scheduled to visit London for a charity event.
But BBC Middle East correspondent Jeremy Cooke says that Mr Sharon routinely refers to Palestinian terrorism and despite the wishes of Washington and London, it is difficult to see any common ground.
The Israeli prime minister is also under pressure at home - two right wing ministers have resigned from his coalition government after what they regard as unacceptable concessions to the Palestinians.
The year-long Palestinian uprising, aimed at Israeli military occupation and creeping Jewish settlement of land seized in the 1967 Middle East war, has cost 875 lives, including 676 Palestinians and 176 Israelis.