The introduction of a "Britain day" and an "earned citizenship" system are among suggestions being put forward by ministers to strengthen national unity.
In a Fabian Society pamphlet, communities secretary Ruth Kelly and immigration minister Liam Byrne said it was essential to create a stronger sense of Britishness and promote common values.
Business leaders are resisting attempts to make any national day celebrating the UK a bank holiday, saying it would damage the economy.
Kelly and Byrne's proposals include allowing immigrants to earn the privileges of citizenship and incentives for active citizens, such as cash top-ups linked to the child trust fund or reduced tuition fees.
Number 10 said Tony Blair welcomed the contribution to the debate over community cohesion.
"The prime minister believes that we should integrate people into the community at large, whilst recognising their diversity," said his official spokesman. "These are ideas put forward as part of the debate, and he welcomes that."
"We are moving from general principles to specific proposals. Those need to be debated further," he added.
The ministers said there was a "critical risk" that after 40 years of increasing diversity in Britain, communities start looking inward and questioning their identity.
"So instead of emphasising what they have in common with others, they stress the divisions and differences," they said.
"Our task in Britain, in the coming decade, is not to plan a separation.
"Nor can it be about assimilation into a mono-culture. Instead we must develop a meaningful sense of what we all - whatever faith, ethnicity and wherever in Britain we are from - hold in common.
"We need a stronger sense of why we live in a common place and have a shared future."
In the joint pamphlet, they add that Britain has for centuries been a religiously and ethnically diverse country with an outward-looking tendency.
"But our liberalism and tolerance have never been unconditional," they added.
"Our diversity has always been underwritten by a subscription to a common set of values including our traditions of fairness and open-mindedness; commitment to Britain and its people; loyalty to our legal and political institutions and a sense in which living in Britain means being part of a local community.
"What we hold in common and the sense that it is good to contribute to wider society has tended to be implicit in Britain - not stated and debated clearly as in some countries like France.
"But today, more than at any time since the Second World War, we need a more vigorous debate about what it is that holds us together and how we express these links more clearly."
Speaking to business leaders, Byrne said the contract between immigrants and Britain had to be clarified.
"On the one hand we need to do more to help newcomers understand our values and the British way of life when they decide to stay," he said.
"But for those who decide to make the UK their future, we need to make it clearer that citizenship isn't simply handed out, but something which is earned."
