Speaking at the Aspen Security Forum, Blair said that CIA drone campaign aimed at al-Qaeda is backfiring by damaging the US-Pakistan relationship.
He suggested giving Pakistan more say in what gets hit and when it wants.
The retired Admiral suggested cutting the cost of hunting down terrorists by relying more on local forces in places like Pakistan, Yemen and Somalia.
Blair, who was forced to resign by the Obama administration, says the White House undercut his position by siding with the CIA, instead of telling it to listen to him.
He said the continuing the drone strikes are more of a nuisance than a real threat to al Qaeda, and that only a ground campaign by Pakistan would truly threaten it and other militant organisations.
'It can sustain its level of resistance to an air-only campaign, he added.
'Pull back on unilateral actions by the US except in extraordinary circumstances, Blair said.
'I think we need to change - in those three countries -in a dramatic way, he said.
'Were alienating the countries concerned, because were treating countries just as places where we go after attack groups that threaten us. We are threatening the prospects for long-term reforms raised by the Arab Spring, which would make these countries capable and willing allies who could infact knock that threat down to a nuisance level, he added.
He also suggested cutting the cost of hunting down terrorists by relying more on local forces in places like Yemen and Somalia.
The US is already working with indigenous forces in both countries, but also sustains a large and expensive offshore presence aboard a ship off the Yemeni coast, as well as flying armed and observation drones from Djibouti and other sites in the region, he said.
He estimated that there are some 4,000 terrorists worldwide, and a budget of some $80 billion devoted to fighting them a figure he said did not include the wars of Afghanistan or Iraq. 'That's $20 million for each of these people ... Is that proportionate?, he asked.