Previous leaders Lancashire had won five of their first six games and got through the first hour without losing a wicket.
But once Mark Chilton edged Mitch Claydon to first slip, wickets started to tumble.
Nightwatchman Gary Keedy swung across the line and was bowled by Blackwell, before Graham Onions picked up his third wicket of the innings when he pinned Steven Croft leg before.
Blackwell then saw Gareth Cross cut a full delivery on to his own stumps and had Tom Smith caught off bat and pad at slip attempting to sweep.
Claydon then had Lancashire captain Glen Chapple caught on the backward point boundary by Dale Benkenstein, before Blackwell wrapped things up when he turned one through Kyle Hogg's defensive push to bowl him.
CLOSE OF PLAY SUMMARIES
BBC Newcastle's Martin Emmerson:
"Lancashire came into this as the form team in the division and without a defeat to their name. Durham sent them packing as they won their third championship match in a row by an innings. I can't remember them doing that before - it may not have happened.
"The victory featured two more centuries - that's 14 for the season - nearly double what anyone else has managed and on this form I'm wondering who can stop them.
"Maybe the answer comes with the FL t20. That starts on Thursday for Durham and has been quite an unwanted distraction for them in recent summers.
"Whatever happens in the short form of the game, let's hope Durham come out of the other side of it playing the sort of cricket we've seen in the last few weeks because it's been a joy.
"Sadly that nasty finger injury to Ben Stokes means he's out for two months. He would have been great to watch in the T20, but at least he'll only miss the one four-day game."
BBC Radio Lancashire's Liam Bradford:
"Lancashire captain Glen Chapple said '10% in all areas' was the margin between the two sides and he's probably right.
"But when two sides of this quality go toe-to-toe, 10% can seem like a yawning, gaping chasm. Lancashire were outplayed here, in a similar way that
Manchester United were outplayed by Barcelona.
There was just too much quality in this Durham side to try and make any kind of fightback.
"It was the morning session on day one that did the damage, a green, seaming wicket saw Lancashire put under the cosh and they weren't allowed to recover.
"Some time now before the next championship game for the Red Rose means they can regroup and rest all the niggling injuries they have suffered.
"The FL t20 beckons, hopefully there'll be more success than Lancashire were allowed here by a fantastic Durham side."
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