THE Government must "change or die" in the wake of last week's by-election blow, Home Secretary David Blunkett has warned.

He cautioned that its current difficulties were imperilling the prospect of a third successive General Election victory, and that the Government faced a "very big challenge" to regain the public's trust.

Mr Blunkett acknowledged that the Iraq war and the Hutton Inquiry had made an impact on the electorate's attitude. The solution, he said, was to persevere with controversial reforms, and work harder to explain their rationale to voters.

Last Thursday, Labour suffered a major reverse at the Brent East by-election, losing to the Liberal Democrats on a 29 per cent swing.

Many voters who deserted Labour cited Mr Blair's decision to commit UK forces to the Iraq war, as well as the controversy over the apparent suicide of Government weapons expert Dr David Kelly, and Lord Hutton's ongoing inquiry into his death.

Mr Blair also faces a potentially difficult annual party conference in Bournemouth next week, during which delegates are likely to pursue discontent over issues such as foundation hospitals and university top-up fees.

Speaking on BBC 1's Breakfast With Frost programme, Mr Blunkett said: "We have got to get back in touch much more readily at the grassroots. My view is that we will never win the third term we need if we are not showing the kind of leadership, the spark that Tony Blair is wanting us to take forward.

"We can't go into a bunker and retrench. We have got to come out, we have got to show people that we know where we are going, what our values are about, and that the things we are doing actually relate to people's lives, that we are on their side."

But asked whether the Government had to change the way it relates to voters, Mr Blunkett said: "I think if we don't change, we die . . .

"We know we have got to. We discussed this on Thursday at Cabinet. We need to renew our connection with the electorate so that they know what we stand for, where we are going, above all that we are looking to a new Britain."

"If we are going to have a third term, it is about modernising, preparing Britain, helping people with rapid change, dealing with the global economy, but rooting it in the neighbourhood."

It has been reported that Mr Blair has approached Darlington MP Alan Milburn and North Tyneside MP Stephen Byers to help draw up Labour's next election manifesto. The two ex-cabinet colleagues are understood to be among those who have been asked to develop radical new policies.

Former Transport Secretary Stephen Byers said last night: "He (Mr Blair) has got to continue on this path (of reform). It's also a big challenge for the party, not to be self-indulgent but to be united and focused."

Mr Blunkett yesterday also called for a national ID card scheme to be included in the Government's next legislative programme after admitting he had no accurate idea how many illegal immigrants were in the UK.

Mr Blunkett acknowledged there was a "vigorous" debate going on within Cabinet over ID cards. But he argued the case for a scheme to be included in the Queen's Speech on November 26.