Mr. Blair held talks in Israel with Ariel Sharon and meets later with Palestinian leaders in Ramallah.
Prime Minister Blair said the planned international conference is to help Palestinians carry out reforms for proper democratic institutions.
During a joint news conference with Prime Minister Ariel Sharon in Jerusalem, Mr. Blair said the London meeting must be seen as part of overall preparations for Israel's disengagement from Gaza and the internationally-sanctioned "road map" peace plan.
"It [the London conference] is not and cannot be a substitute for the conferences under the 'road map' or what then happens in any negotiation that takes place at a later stage," he said. "But, what it can do, I hope, is ensure there are plans and proposals in place to allow the Palestinian side to become a proper partner for peace with Israel."
Mr. Blair said proper preparation is important for the vision of a viable Palestinian state to become reality.
"But, viability cannot just be about territory. The viability has to be that of a state that is democratic, that is not giving any succor or help to terrorism and that uses the help that it is given from the outside in a proper and transparent way," added Mr. Blair.
Prime Minister Sharon said Israel supports the London conference, but will not send a delegation to attend.
Mr. Sharon also repeated his position that the disengagement plan - to withdraw Jewish settlements from Gaza and from small portions of the northern West Bank - can lead to broader negotiations if the Palestinians stop terrorist attacks, violence, and incitement.
"I believe that if the terror will come to its end, the door will be open for the Roadmap, which will change I believe, the life of the Israelis, the Palestinians and change the situation in the region," said Mr. Sharon.
Mr. Blair said everyone must understand that terrorism is not the way to negotiations, but rather a hindrance.
"There is not going to be any successful negotiation or peace without an end to terrorism," he said.
The British prime minister also meets with Palestinian leaders in Ramallah, including PLO chief Mahmoud Abbas, the front-runner to succeed Yasser Arafat as Palestinian Authority President in elections scheduled for January 9.
Mr. Blair and other world leaders have said Mr. Arafat's death last month presents a unique opportunity to revive peace negotiations. He has also said resolving the Israeli-Palestinian conflict is vital for success in the broader effort against global terrorism.