Mr Bush told Mr Blair in order for the violence to end, that Hezbollah must "stop doing this shit", referring to the group’s attacks on Israel.
An open microphone at a lunch of G8 leaders in Saint Petersburg, Russia, captured every word as Mr Bush and Mr Blair candidly discussed global events.
The two leaders also appeared to express frustration with UN Secretary General Kofi Annan over his response to the Middle East conflict.
Mr Bush added that US Secretary of State Condoleezza Rice would soon tour the Middle East.
Mr Bush, eating a piece of bread and calling for a diet Coke, confided that "Condi's going to go pretty soon."
He did not specify where, but the US State Department confirmed that Ms Rice would go to the Middle East after a UN team returns later this week.
Bush laughed off broadcast: White House
When later told of the broadcast of his unguarded comments Mr Bush "rolled his eyes and laughed" a White House spokesman said.
Journalists asked White House spokesman Tony Snow, what Mr Bush felt when he was told about the broadcast of the comments.
Mr Snow said: "His reaction first was, 'What did I say?' So we showed him the transcript, then he rolled his eyes and laughed."
Reporters went onto asked Mr Snow whether he had a comment about the president's use of an expletive and in response Mr Snow raised a laugh when he replied: "Not unless you've never used it."
Blair’s offer
Mr Blair also gave the US President an offer to go to the Middle East ahead of Ms Rice if "she needs the ground prepared as it were."
He went onto explain that the stakes for him would be lower: "If she goes out she's got to succeed, as it were, whereas I can just go out and talk," Mr Blair said.
"The irony is, what they need to do is get Syria to get Hezbollah to stop doing this shit, and it's over," Mr Bush replied without specifying who "they" are.
The United States has maintained Israel has every right to defend itself and also urged restraint over the offensive, which has split the international community and raised fears of dragging Syria and Iran into the conflict.
Israel has said the aim of its operation is to destroy Hezbollah, which was instrumental in its withdrawal from Lebanon in 2000 after a long and bloody occupation.
UN responds to comments
In his candid comments Mr Bush had suggested that UN chief Mr Annan thinks that a ceasefire by itself will resolve the Israel-Lebanon conflict.
Mr Snow called Mr Bush’s remarks "a slice of a conversation that was a carry-over from previous conversations."
But a top UN official has said the United Nations has been speaking to Syria over the escalating crisis in the Middle East, including a conversation between Kofi Annan and the Syrian president.
UN Deputy Secretary General, Mark Malloch Brown, told the BBC that Mr Annan spoke to Syrian president Bashar al-Assad a few days ago.
"An envoy met with the Syrian foreign minister as well. We have had a number of contacts and we will keep them up," Mr Malloch Brown said.
"We have been very clear in conveying a message that we have to persuade both sides (Hezbollah and Israel) to pull back from hostilities and particularly the attacks on innocent civilians."
Syria and close ally Iran, which both back the Shi'ite militant group Hizbollah, have been openly blamed by the United States and Israel for the escalation of tensions in the region.