The moves are designed to allow Mr Blunkett to rush through the bill - introduced in response to the 11 September US terror atrocities - before Parliament breaks up for the Christmas recess.
The olive branch comes after Tory and Liberal Democrat peers united to inflict seven significant defeats on the government on Thursday night.
The amendments would include referring matters of religious hatred to the Attorney General and limiting the introduction of anti-terrorist measures agreed at a European level.
Opposition parties gave the changes a cautious welcome.
Mr Blunkett insisted he would still ensure that the House of Commons overturned Lords defeats on other sections of the Bill.
His amendments will be put to the House of Lords on Monday.
They will offer guidelines from the Attorney-General, defining what constitutes incitement to religious hatred, as insurance against abuse of the new offence.
EU summit
The guidance aims to quell fears that the law might be used, for example, to prosecute people who quote from religious texts in public, said Home Office sources.
The second amendment will introduce a "sunset clause", limiting until June 2002 the period in which European anti-terror measures can be introduced by secondary legislation.
It will also make clear that the only measures to be rushed through in this way are those drawn up by the EU Justice and Home Affairs Council in the immediate aftermath of 11 September and due for approval at the EU's Laeken summit in Belgium next weekend.
Powers to introduce the EU-wide terror laws by secondary legislation will be reintroduced in the Extradition Bill in the New Year, when there will be more time for debate, said the Home Office.
Britain 'at risk'
Labour peer Lord Desai, who voted against the government on Thursday, said he "and many other people" would be willing to reverse the Lords' amendments if key changes were made.
This would be "if the government makes concessions on the European matter and on religious hatred - withdrew the religious hatred thing altogether," he told BBC News 24.
Shadow home secretary Oliver Letwin said on Friday: "We are very pleased to see that the Home Secretary is making significant moves towards obtaining a consensus on this important bill.
"We will have to look very carefully at what he is proposing and how it will work in practice."
Liberal Democrat home affairs spokesman Simon Hughes said he welcomed the governments acceptance that improvements could be made to the bill.
Earlier Mr Blunkett had insisted he would not give in to what he termed "deliberate sabotage" by the Lords.
He said it was essential the bill was passed as drafted and warned that Britain remained at risk from terrorist attack because of the UK's close relationship with the United States.
Hands tied
Announcing his compromise on Friday, Mr Blunkett said: "I have always said that if any sensible proposals are put to improve the bill, we will listen and respond.
"This is what I am doing today.
"However, the amendments made last night would tie our hands in effectively tackling terrorists.
"The attempt to distinguish crime from terrorism is naive and impractical and I will ask the Commons to reverse last night's amendments next week."
Opposition parties had claimed the bill went "far beyond" the fight against terrorism and would affect the privacy and liberty of ordinary citizens.