"I think it is right... that we have a look at the intelligence that we received and whether it was accurate or not," Blair told a senior parliamentary committee in London.
Foreign Secretary Jack Straw will make a statement to parliament at 1230 GMT, spelling out details of the inquiry.
Blair's announcement comes a day after United States President George Bush launched an investigation into pre-war charges that Saddam Hussein's Iraq possessed weapons of mass destruction.
Blair acknowledged that chief US weapons hunter David Kay, who quit his post last month, believed Iraq had no stockpiles of illicit weapons.
"This is one of the reasons why I think we need a further inquiry," the premier said.
Blair appeared to qualify his language to the UK parliament's Liaison Committee, saying military action was taken because Iraq was an unstable state with "WMD capability" that at some point in the future could have fallen into the hands of armed groups.
Political sources said argument between the government and Britain's main opposition parties had raged over whether the inquiry would examine the political decisions taken to wage war, rather than focus exclusively on problems with the intelligence Blair's team received.
"It gives ammunition to those who say Mr Blair is the US president's poodle"
Financial Times, London
Blair had repeatedly turned down calls for an inquiry and had asked that the Iraq Survey Group, which has been scouring Iraq for evidence of banned weapons after Baghdad fell in April 2003, be allowed to finish its job.
The widely anticipated move was met with scepticism from the British press who described the developments as a major U-turn.
"Following so hard on the heels of George Bush's announcement of his own inquiry, it gives ammunition to those who say Mr Blair is the US president's poodle," said the Financial Times, London's main business newspaper.
Blair, to a much greater extent than Bush, cited Saddam's refusal to give up his pursuit of chemical and biological weapons as the main reason for taking Britain into the US-led Iraq campaign last March.
Many London-based newspapers said Blair would want the findings of the inquiry to be published before the end of the year, well before the next general election, not expected before the spring of 2005.
Pressure in both London and Washington for a probe into the Iraqi intelligence was compounded when David Kay resigned as head of the Iraq Survey Group and told US lawmakers last week he believed Iraq did not possess chemical, biological or nuclear weapons.