The Prince of Wales suggested Catholics should be able to ascend to the British throne, in a private conversation with the Prime Minister, Mr Blair, and Mr Paddy Ashdown, then leader of the Liberal Democrats, it was reported last night.
The prince made the remarks as they returned to London after attending the funeral of the assassinated Israeli prime minister, Yitzhak Rabin, according to a serialisation of Mr Ashdown's diaries in London Times.
Prince Charles was chatting to Mr Blair, then leader of the opposition, Mr Ashdown and the Chief Rabbi, Dr Jonathan Sacks, when he made the comment five years ago, the paper reports.
"Charles looked at me, smiled broadly and said: `I really can't think why we can't have Catholics on the throne'," Mr Ashdown writes.
Such a move would overturn the Act of Settlement of 1701, which bars Catholics from the line of succession.
The former Liberal Democrat leader told the paper he gulped as the prince made the remark because "it seemed such an obvious reference to Camilla Parker Bowles", the prince's lover.
However, while Ms Parker Bowles was married to a Catholic she is not one herself and constitutional experts told the paper the 1701 Act would not prevent her becoming queen if she married the prince.
The prince has previously caused controversy by suggesting his title as head of the Church of England of Defender of the Faith could be changed to Defender of the Faiths.
Last night a spokeswoman at St James' Palace, the prince's residence, said: "Obviously it was a private conversation and sounds to me as if it was a quiet aside."