A DEFIANT Tony Blair last night called for a new debate within the Labour Party on how it should face the challenges of the coming decade and lay the foundations of a fourth General Election victory.

In a combative speech delivered in his Sedgefield constituency, he mounted an impassioned defence of his controversial programme of public service reforms, which has put him at odds with many party traditionalists.

He reminded the party of how far it had come since 1997. "I sometimes wish people could glimpse, just for a second, how Britain might look if we were now in the 27th consecutive year of Conservative Government," he said to shudders at the meeting of party activists in Trimdon Labour Club.

He announced a new debate about the "direction of travel" which will be launched by himself, party chairman Ian McCartney and Deputy Prime Minister John Prescott after the May local elections.

He likened it in terms of importance to his landmark reform 12 years ago of the old Clause IV of the party constitution, which committed Labour to nationalisation.

"Now, as it was then, the issue is how we pursue our historic values while recognising that the means we use must be based on the challenges of today's world and the expectations of today's citizens," he said.

"This is the very core of New Labour: always pursue the values of solidarity and equity, but never be conservative about your means. Unchanging on the why - but flexible on the how."

Following Wednesday's vote on the Education Bill, which the Government won only with the support of the Tories as 52 Labour MPs rebelled, he acknowledged there were "real concerns in certain parts of the party" about the direction of travel, but he repeated that the party had to reform public services if it was to meet the expectations of the voters.

Rejecting comparisons with Ramsay MacDonald, the first Labour Prime Minister who was seen as a traitor after a forming a National Government with the Tories, he said: "The reason I advocate change is not because I want to provoke Party division. Still less because I see myself as 'Ramsay MacBlair' betraying the Labour Party's values or seeking my so called legacy, but because one way or another any government will have to meet these challenges in today's world.

"That is the pattern of the future that we can't alter. But what we can do, is ensure that it is progressive values of fairness and social justice that govern this future, not those of the Conservative party that would take our nation backwards.

"It's not about me. It's about us and about our country."

The changes the country had undergone could be seen in his constituency. "I passed on my way back to Trimdon through Fishburn where you see three or four-bedroom homes for sale for over £140,000 and I think back to 1983 when I became MP here and in many villages unemployment was over 30 per cent," he said.

Before he left London, he attempted to defuse the growing "Loangate" controversy. Last night, Channel 4 News alleged that Labour had received "somewhere in the region" of £12m in undisclosed loans.

Mr Blair said an independent figure would be appointed to start inter-party talks about state funding for parties. He is also in favour of another independent figure being appointed to advise ministers on their financial interests - some- thing which No 10 had rejected in the wake of the Tessa Jowell affair.

And he said he wanted to renounce the right personally to nominate people for honours.