Blair has refused to rule out a military option against Iran, and his office on Sunday declined to say whether the prime minister would back military intervention.
The report said that an attack by the US or its regional ally, Israel, could spur more violence in Iraq from Iran-linked Shiite insurgents.
"Iran's links with Hezbollah in Lebanon, Hamas in the West Bank and Gaza as well as Shia constituencies in Iraq, Afghanistan and the Gulf States make regional retaliation against any military attack on Iran likely," the report said. "UK forces in Iraq and Afghanistan could be particularly vulnerable, with significant losses possible."
An attack could also increase terrorism by fueling anti-Western sentiment around the world, while strikes on nuclear facilities risk unleashing radioactive contamination, the report said.
Ali Ansari, director of the Institute of Iranian Studies at St Andrews University in Scotland, said both sides needed to step back from the brink.
"The view held by some in Washington that all diplomatic and political options have been exhausted is a palpable nonsense that needs to be challenged," he said.
At the same time, "the Iranian government needs to recognize the danger it faces."
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