Lord Mandelson, one of the architects of New Labour, warned that the party was in the same predicament as in the 1980s and had made "terrible mistakes" in strategy since 2010.
Speaking on the BBC's Andrew Marr show, the former business and enterprise secretary warned that the party would have to reclaim the centre ground if it hoped to win power again.
"We were sent off in 2010 on a sort of giant political experiment in which we were sent out and told to wave our fists angrily at the nasty Tories and wait for the public to realise how much they had missed us," said Mandelson. "They weren't missing us. They didn't miss us. Instead they ripped the stripes off our shoulders."
He said that the party made a "terrible mistake" in failing to revitalise the New Labour strategy of targeting the aspirational classes after the 2010 elections defeat.
Mandelson compared the challenge the party faced to that in the late 1980s, when the party's left and modernising right battled to determined its direction.
"Far from embarking on a short-term beauty contest of leaders what we really need is a very, very thorough debate in the party of the sort that was denied us in 2010," he said. "We were sent out and told to say things and to make an argument, if you can call it an argument, that said we are for the poor, we hate the rich – ignoring completely the vast swathes of the population who exist in between."
Appearing alongside Mandelson, prospective leadership candidate and Shadow Business Secretary Chuka Ummuna said that the party could recover in time to claim victory in the 2010 election "if it made the right decisions now".
He said he wanted to play "the fullest part in rebuilding our party".