"I think Pakistan is paying a heavy price for the mistakes of 1970s by linking religion with politics and developing religious schools which are, in some cases, dangerous sources of extremism," Blair told CNN-IBN.
The former British Prime Minister was responding to queries relating to the role of ISI in spreading terrorism and its links with the Haqqani group in Afghanistan.
When asked if the US, after eliminating Osama bin laden, should also go after the Haqqani faction, Blair said it was something which the Americans have to decide.
"The trouble with these groups is that there is no way to use them wisely. On these issues like Pakistan might have to say about its influence in Afghanistan vis-a-vis India's influence there, there will be nothing good out of supporting these groups," he said.
"If ISI is engaged in such activities, in the end it will not merely affect US, UK, Afghanistan or India, it poisons the atmosphere in Pakistan also," Blair said.
The former British Prime Minister said that if there was any linkage between the ISI and terror groups such as the Haqqani group and the Lashkar-e-Toiba, "it is a mistake."
Blair said there was a need to engage "modern and open-minded" Pakistanis who are involved in a struggle against the extremists.
"We have to see how we can engage elements in Pakistan who believe that this was a mistake. The best way is to allow Pakistan to change and evolve and there are a lot of decent people in Pakistan," he said.