Hamas has been isolated because of its refusal to meet three criteria: recognition of Israel's right to exist, renunciation of violence and adherence to interim peace deals with Israel.
Michael Gapes, chairman of the committee, said the the world's lack of a positive response had contributed to the deteriorating situation.
Factional fighting
Fighting between Hamas and the rival Fatah movement eventually led to Hamas taking control of the Gaza Strip in June, while Fatah - Palestinian president Mahmoud Abbas's movement - administered the West Bank.
Gapes said: "If we're ever going to get a Palestinian state alongside a secure Israel, then we've got to have the involvement of Gaza as well as the West Bank and, frankly, operating on any other basis will not give us a two-state solution."
The committee also criticises Blair for not calling for an immediate end to the war between Israel and Lebanon's Hezbollah movement last summer, concluding that his failure to speak out damaged Britain's reputation and led to high casualties among civilians.
Moreover, the report also said that the US's so-called "surge" tactic in Iraq was likely to fail. It called on the British government to help Iraqi factions reach agreement on key issues.