The settlement is believed to have been approved by Will Lewis, the company's general manager and a member of the management and standards committee.
The deal with Blunkett is the latest out-of-court settlement by News International. The chief executive of the Professional Footballers Association, Gordon Taylor, received £700,000 in costs and damages in 2007, while it is claimed that last year celebrity publicist Max Clifford received a retainer of £200,000 a year for two years.
The question of who approved the out-of-court settlements is becoming an issue in the scandal.
James Murdoch, chief executive of News Corp's Europe operations, has told MPs that he did not authorise the agreement with Clifford.
It has been claimed by lawyers representing the Murdochs that Brooks personally negotiated the deal because she had authority to do so.
Blunkett declined to talk directly to the Observer, claiming its actions "constitute harassment". He said he had referred the newspaper's emailed questions to him to Lord Justice Leveson, the judge leading the inquiry into press ethics, saying they were an example "of blinding hypocrisy" and warned that he was considering a complaint about the newspaper's actions to the Press Complaints Commission.
His spokeswoman said: "Mr Blunkett has made it clear that his private life was intruded on grossly between the beginning of 2004 and the end of 2005. He has also made it clear that he has no intention of allowing further intrusion into his private life by the Observer, or any other newspaper purporting to be reporting in the public interest. He has not commented and does not intend to comment on anything to do with Operation Weeting [the police investigation into phone hacking] to anyone other than those investigating wrongdoing."
The Blunkett settlement will trigger interest in how many confidential payouts News Corp has agreed with people who feel the News of the World invaded their privacy.
It is unclear whether Blunkett will raise the apparent hacking of his phone with the Leveson inquiry or the Metropolitan Police, which is conducting several investigations into the scandal. But it is likely news of his settlement will be scrutinised closely as it raises potential issues of national security.
As the Home Secretary, Blunkett was in charge of the security service MI5, and the suggestion that the security of his phone was compromised would worry the police and counter-terrorism officials.
Blunkett has enjoyed a close professional relationship with News International and is a friend of Brooks, dining with her the night he resigned from government in 2005. His register of interests shows that he advises News International on corporate social responsibility issues on a six-month contract, worth £25,000.
He also has an occasional advice column for the Times, worth up to £5000 per financial year. Before October 2009 he wrote a column for the Sun worth around £45,000 a year.
There have been suggestions that any MP receiving a payout from News International relating to phone hacking would be obliged to declare it to Parliament. But it is not clear from parliamentary guidelines whether a payment of this nature would be registerable.
His spokeswoman said: "Mr Blunkett complies entirely with the register of members' interests and any suggestion otherwise will result in legal action."
A spokesman for News International declined to comment.
- Observer
