Dec. 19 (Bloomberg) -- Prime Minister Tony Blair's successor will have to distance Britain from the U.S. and draw closer to Europe because of the ``debacle'' of Iraq, Chatham House said in a study on the future of U.K. foreign policy.

Blair, planning to leave office next year, is traveling in the Middle East this week, seeking to revive the peace process between Israel and Palestinians and to curb violence in Iraq. Blair backed President George W. Bush's invasion of Iraq in 2003.

``A distancing of the U.K. from the U.S. and a closer relationship with Europe are requirements of the post-Blair foreign policy,'' the London-based international affairs institute said in London today.

Blair brushed aside the findings, saying that shifting away from the U.S. would be a ``fundamental mistake'' and that Britain would ``pay a very heavy price'' such a move. He said he was working with Bush to revive peace talks in the region.

``The relationship with America is a strength,'' Blair told reporters in Dubai today. ``You can't find a solution or make progress in Israel or Palestine without America.''

The report, by Victor Bulmer-Thomas, who steps down as director of Chatham House on Dec. 31, is aimed at stimulating debate about the direction of foreign policy after Blair retires. Chancellor of the Exchequer Gordon Brown, the ruling Labour Party's finance minister since 1997, is favorite to take over.

`Mistake'

The report calls the invasion of Iraq a ``terrible mistake'' and says the root failure of Blair's foreign policy has been his inability to influence the Bush administration in any significant way. The absence of a United Nations Security Council Resolution authorizing the use of force drove a ``horse and cart'' through Blair's doctrine of international community, it said.

The post-invasion ``debacle'' in Iraq has undermined British influence overseas, making it harder for Blair to broker a settlement between Israelis and Palestinians, the report said.

Bulmer-Thomas said the world is a more dangerous place as a result of the Iraq war and that Blair has exaggerated his influence in Washington. France and Germany opposed the invasion of Iraq.

The next prime minister has to ``have a more balanced relationship with the U.S. and find some way of rebuilding the European project,'' he said in an interview. ``Britain has to play to its strengths and one of its strengths is as a member of the European Union.''

U.K. Foreign Secretary Margaret Beckett dismissed the report as ``plain wrong.''

`Ridiculously Wrong'

``The culmination of this thesis that Britain and this prime minister now lack influence in the world is so ridiculously wrong,'' she told BBC Radio 4's Today program. ``When it comes to the government's negotiators, the people trying to do deals, Tony Blair's influence continues to be substantial.

``I don't accept underlying premise that what's happening in the Middle East is the result of Iraq,'' she said. ``The prime minister is there and he would not be there if it was a complete waste of time.''

Blair's support for Bush and the Iraq war have helped reduce the popularity ratings for the ruling Labour Party to record lows this year.

Labour had the support of 33 percent of voters compared with 34 percent for the opposition Conservative Party and 19 percent for Liberal Democrats, according to a survey of 1,513 voters between Dec. 8 and Dec. 10 conducted by Populus Ltd.

To contact the reporters on this story: Mark Deen in London at markdeen@bloomberg.netGonzalo Vina in Dubai at gvina@bloomberg.net

Last Updated: December 19, 2006 11:48 EST