The report said some IRA members remain involved in crime
Monitors' statement
He was speaking after the Independent Monitoring Commission said the IRA had changed radically and some of its most important structures were dismantled.
The prime minister said politicians now had a "unique opportunity" to reach a "final settlement".
The government hopes the report will help its efforts to restore devolution before the 24 November deadline.
Out of the IMC's 12 reports so far, it is its most positive report about IRA activities to date.
READ THE REPORT
Independent Monitoring Commission 12th report [912KB] Most computers will open this document automatically, but you may need Adobe Reader Download the reader here
The report indicates that a number of key parts of the IRA's structure have been dismantled or substantially reduced.
Mr Blair said there was "now a consensus across all main players in the politics of Northern Ireland, that change can only come through persuasion and not through violence of any sort".
"The IRA has done what we asked it to do, and while issues like policing remain to be solved, the door is now open to a final settlement, which is why the talks next week in Scotland are going to be so important."
ANALYSIS This is exactly what the British and Irish governments wanted to hear
Vincent Kearney
NI home affairs correspondent
Report satisfies governments Game on for devolution deal?
"That doesn't mean that criminal activity by all members has stopped but the leadership has made public statements and internal directions, investigated incidents of breach of the policy, even expelled some members and has emphasised the importance of ensuring that business affairs are conducted in a legitimate way," he said.
The report said there was not enough evidence or intelligence information for it to say who killed Denis Donaldson, the self-confessed British spy and former head of Sinn Fein's office at Stormont, who was shot dead in County Donegal in April.
DUP leader Ian Paisley said he was encouraged that his party's pressure was working and if Sinn Fein signed up to policing there could be a deal.
"If the police question is settled absolutely on a democratic basis and principle we would have come a long way along the road," he said.
Sinn Fein President Gerry Adams said: "The DUP don't have anything other than very limited options.
"They will or will not participate in power-sharing arrangements. If they don't participate they are condemning people here, but particularly their own constituents, to second class public services, run by second class fly-in, fly-out British ministers.
"All the DUP can do is to delay, is to attempt to slow down, but they can't stop the process of changing."
Northern Ireland Secretary Peter Hain said: "We believe this report does lay the basis for a final settlement of the conflict in Northern Ireland and an end to the political stalemate.
"As such we think it presents a unique opportunity for this generation of politicians to reach that final solution, an opportunity the government hopes the parties will now seize and not miss a fantastic window."
In a statement, Irish Taoiseach Bertie Ahern "warmly welcomed" the report's findings.
"These positive and clear-cut findings are of the utmost importance and significance," he said.
Referring to talks due to take place in Scotland next week aimed at restoring devolution he said: "It is time to make decisions and for Northern Ireland to look to the future."
The SDLP's Alasdair McDonnell said: "What's very clear is that the Army Council has moved forward and dismantled the war machine.
"I welcome the moves the IRA have made."
HAVE YOUR SAY The only thing that will bring N Ireland's problems to an end is the total disarmament of all paramilitaries
Martyn Leman, Wigan, UK
Send us your comments
PUP leader David Ervine said he did not accept that the IMC was independent.
"There is a trend that suggests that our war is over," he said.
The UUP's Dermot Nesbit said that while "IRA terrorism and paramilitary activity" has ceased the "organisation remained".
"The IRA is still an illegal organisation and it is using illegally gained funds for political purposes," he said.
The Independent Monitoring Commission was set up by the British and Irish governments in January 2004.
Most of its reports have concentrated on activity by paramilitary groups in Northern Ireland.
However, it also monitors the "normalisation" of security measures in the province.
Its four commissioners come from Northern Ireland, the Republic of Ireland, Britain and the US.
Republican mural, Derry 1986, with evidence of vandalism.
The Independent Monitoring Commission has reported that the Provisional Irish Republican Army has undergone major changes within their military structure and shows that the IRA Army Council wants to put its military campaign behind it. The Commission consists of John Alderdice, a former Alliance Party leader; Joe Brosnan, former Secretary General of the Department of Justice, Republic of Ireland; John Grieve, former Deputy Assistant Commissioner of the Metropolitan Police and former head of the Metropolitan Police Anti-Terror Branch; and Dick Kerr, former Deputy Director of Central Intelligence Agency.

The report states the IRA no longer has the capacity to mount a military campaign anymore or return to one. The units that have been shut down were responsible for weapons-making, arms smuggling and training. The IRA decommissioned their arms last year.

The report also mentions that the IRA has also put its criminality beyond use and is "clamping down" on criminals within the organization, said Lord Alderdice, as he presented the report. He also added, "That doesn't mean that criminal activity by all members has stopped but the leadership has made public statements and internal directions, investigated incidents of breach of the policy, even expelled some members and has emphasised the importance of ensuring that business affairs are conducted in a legitimate way." 

Finally, the report added that there is not enough evidence or intelligence to identify who killed Denis Donaldson, a British spy who infiltrated the IRA and Sinn Fein, before revealing his status as a spy.

However, the report added that splinter groups like the Real IRA (RIRA) and Continuity IRA (CIRA) are still threats and are still continuing their activity. The Real IRA was the group behind the deadly 1998 Omagh bombing. The Irish National Liberation Army (INLA) "was not capable of undertaking a sustained campaign against the British State, nor does it aspire to" according to the report.

It is also noted the creation of two new organizations, Oglaigh na hEireann (Irish Gaelic for "Volunteers of Ireland" and is used by the Irish Defence Forces and the various IRAs.) and the Republican Defence Army. However, the groups are small dissident factions according to the report. 

The report also added that the two loyalist paramilitaries, the Ulster Defence Association (UDA) and the Ulster Volunteer Force (UVF) are also beginning to move from violence but at slower pace and not at a grassroots level like the IRA. Another loyalist paramilitary, the Loyalist Volunteer Force

The report was received warmly by Irish Toaiseach Bertie Ahern and British Prime Minister Tony Blair. Ahern, said "These positive and clear-cut findings are of the utmost importance and significance. It is time to make decisions and for Northern Ireland to look to the future."

"The IRA has done what we asked it to do, and while issues like policing remain to be solved, the door is now open to a final settlement, which is why the talks next week in Scotland are going to be so important." said Tony Blair in a live statement.

In a surprising reaction, the notoriously hardline leader of the Democratic Unionist Party, Ian Paisley, also welcomed the report. He believes that his party's pressure is working and if Sinn Fein signs up to policing there could be a deal. Paisley said, "If the police question is settled absolutely on a democratic basis and principle we would have come a long way along the road."

Sinn Fein leader Gerry Adams said "The DUP don't have anything other than very limited options. They will or will not participate in power-sharing arrangements. If they don't participate they are condemning people here, but particularly their own constituents, to second class public services, run by second class fly-in, fly-out British ministers. All the DUP can do is to delay, is to attempt to slow down, but they can't stop the process of changing."