A Swiss prosecutor said in a legal document released this week that former FIFA President Joao Havelange and former executive committee member Ricardo Teixeira took multi-million bribes on World Cup deals in the 1990s.
Blatter, who has been with FIFA since 1975, and succeeded Havelange as president in 1998, said on Thursday he knew that payments were being made. He referred to them as "commission" and said they were not illegal at the time.
Politicians from the parliamentary arm of the 47-nation Council of Europe condemned FIFA for trying to hush up the affair.
"If FIFA managers - including its current President - were aware of these bribes, they should have been doing everything in their power to prosecute, rather than protect, the officials concerned," French politician Francois Rochebloine said.
He urged Blatter to come clean on his role in a scandal that occurred when he was FIFA General Secretary.
"When exactly did he become aware of these payments? Why did FIFA hide wrongdoing and fail to take action against its perpetrators? Above all, what steps will he now take to stop this happening again?," he added.
Asked in a question-and-answer session with FIFA's own website on Thursday if he had known of payments, Blatter replied: "Known what? That commission was paid? Back then, such payments could even be deducted from tax as a business expense.
"Today, that would be punishable under law. You can't judge the past on the basis of today's standards."
Brazilian Havelange, who recently celebrated his 96th birthday, was head of FIFA from 1974 to 1998. He received a payment of 1.5 million Swiss francs in March 1997 from now-defunct sports marketing body ISL, the Swiss prosecutor said.
Teixeira, 65, who led the Brazilian Football Confederation from 1989 until stepping down earlier this year, took 12.7 million francs between 1992 and 1997, the prosecutor said.
ISL sold the commercial rights to broadcast World Cup competitions on behalf of FIFA. It collapsed with debts of around $300 million in 2001.
Blatter, who has been president for 14 years since succeeding Havelange, said FIFA had reacted by "strengthening our control mechanisms."
"The ethics committee, which was created in 2006 on my initiative, is a direct result of the ISL case," he said. "The reform process is moving exactly in this direction.
"To strengthen FIFA's judicial system, some important steps have already been taken with the introduction of a two-chamber system - an adjudicatory body and an investigatory body. The executive committee will appoint the chairmen of these two chambers next week."
Havelange is still FIFA's honorary president while Teixeira quit his post earlier this year, shortly after resigning as president of the Brazilian Football Confederation.
"I don't have the power to call him to account," said Blatter of Havelange. "The Congress named him as Honorary President. Only the Congress can decide his future."