"Sometimes you've got to put things into words that the public will understand," the former U.N. weapons inspector said in a tape-recorded conversation with a British Broadcasting Corp. reporter.
The inquiry, headed by a senior appeals judge, is investigating Kelly's suicide, which came days after he was publicly identified as the source of a BBC story suggesting the government overstated the danger posed by Iraq to justify going to war.
The government denies that, and its bitter feud with the BBC has triggered the biggest crisis of Blair's six-year term — especially as no weapons of mass destruction have been found in Iraq.
Blair's government and the broadcaster both hope to be vindicated by the inquiry, in its third day Wednesday.
Kelly's posthumous reputation is at stake, as he denied being the BBC's source.
Blair's communications director, Alastair Campbell, is also on the line: A BBC reporter had said Kelly pointed to Campbell as the one who hyped the intelligence dossier.
On the tape, which was played at the inquiry, Kelly said Blair aides seized on intelligence that Saddam Hussein could launch chemical and biological weapons at 45 minutes' notice and that the claim "got out of all proportion" in the dossier.
"They (the government) were desperate for information," Kelly said of the 45 minute claim, which came from one source and was considered by weapons experts, including Kelly, to be dubious.
"That was one that popped up and it was seized on, and it was unfortunate that it was," the scientist told BBC reporter Susan Watts.
Kelly seemed to accept that the government had changed the wording of intelligence material for "public consumption," to make it more understandable.
"I don't think they're being willfully dishonest, I think they just think that that's the way the public will appreciate it best," he said.
Intelligence officials were not concerned about Iraq's current weapons capability as much as what Saddam would have in the future, he said.
"But that unfortunately wasn't expressed strongly in the dossier, because that takes away the case for war to a certain extent."
Kelly, 59, a leading British government scientist, was found dead near his home in southern England with his wrist slashed on July 18.
Though he denied it, Kelly emerged as the main source of a report by BBC defense correspondent Andrew Gilligan that raised questions about whether the government misled Britain about the case for war.
Gilligan quoted an anonymous official as saying that Blair's office had "sexed up" last September's dossier and that the 45 minute claim was included against the wishes of intelligence chiefs.
In a subsequent newspaper article, Gilligan suggested the source, later confirmed to be Kelly, had pointed to Blair's communication's director as the one responsible for including the claim.
While the inquiry Tuesday focused on testimony from Gilligan, the tape played Wednesday was from the scientist's later conversation with Watts, in which she asks him to explain Campbell's role.
"So would it be accurate then ... to say that it was Alastair Campbell himself who ... ?" Watts asks on the tape, inaudible at times.
Kelly responded: "No, I can't. All I can is the No. 10 press office," referring to Blair's official residence at No. 10 Downing St.
He added: "I've never met Alastair Campbell so I can't ... But ... I think Alastair Campbell is synonymous with that press office because he's responsible for it."
Watts told the inquiry BBC editors tried to "mould" her stories to match Gilligan's, the Guardian reports.
Only days before his death, Kelly denied being the source of Gilligan's report and told a parliamentary committee he did not believe Campbell had inflated the dossier.
The inquiry, which was in its third day Wednesday, earlier heard that the BCC had doubts about Gilligan's story but mounted a forceful defense of it anyway, in the face of attacks from Blair's aides.
According to the Times of London, an e-mail from one BBC editor to the head of BBC Radio News said Gilligan's story was "a good piece of investigative journalism marred by flawed reporting. The biggest millstone has been the loose use of language and lack of judgment in some of the phraseology."
But the inquiry also revealed that doubts about the way the case for war was presented went beyond Kelly, reports The Guardian.
"As probably the most senior and experienced intelligence community official working on 'WMD', I was so concerned about the manner in which intelligence assessments for which I had some responsibility were being presented in the dossier ... that I was moved to write ... recording and explaining my reservations," one intelligence expert wrote to his superior.
The appeals judge heading the inquiry has said he wants Blair to testify.