Members of Parliament and senators crowded into the House of Representatives to hear Mr Blair say that the struggle facing the world today was not just about security.
"(It is also) a struggle about values and about modernity, whether to be at ease with it or enraged at it," said Mr Blair.
"And to win this struggle we have to win the battle of values as much as arms."
Mr Blair said the key to winning the battle against extremist elements was to show it was not a fight of the West against Islam, but about the ownership of common values.
"We have to show that these are not Western ... American or Anglo Saxon values, but values in the common ownership of humanity, universal values that should be the right of the global citizen," he said.
"This is the challenge I believe we face and ranged against us are of course the people who hate us, but beyond them are many more who don't hate us but question our motives, our good faith, our even-handedness, who could support our values but believe we support them selectively."
These were people that countries such as Britain had to persuade, Mr Blair said.
"They have to know this struggle is about justice and tolerance as well as security and prosperity," he said.
"And in truth today there is no prosperity without security and no security without justice" he said.
Blair tributes
Australian Prime Minister, John Howard paid tribute to Mr Blair's commitment to anti-terrorism.
Welcoming Mr Blair to federal parliament Mr Howard praised the British leader's response to the September 11, 2001 attacks on America.
He told the parliament that nobody better articulated the reality that it was not just an attack on the people of the United States but also upon the values and people of nations around the world.
Opposition Leader Kim Beazley also welcomed his old friend to parliament while acknowledging they hold differing positions on the war in Iraq.
Blair on Hicks
The British Prime Minister ruled out the possibility of holding a meeting with the father of Guantanamo Bay detainee David Hicks, saying it would be inappropriate.
Terry Hicks was invited to attend a Canberra lunch in honour of Mr Blair, as a guest of Greens senator Kerry Nettle, and had hoped to discuss his son's case with the British leader.
David Hicks, who has been held at the US base in Cuba since early 2002, has applied for British citizenship in an attempt to improve his chances of being freed.
Mr Hicks, whose mother is British, won the right to a British passport in London's High Court last December, but the British government has appealed against the ruling.
"We've got a court case about the application of David Hicks and it wouldn't be appropriate or right for me to meet his father but I've asked the British high commissioner to do so," Mr Blair told ABC radio.