I'm using one of HDRI from http://www.hdrlabs.com/sibl/archive.html. I would like to blend/merge it with scene but in a way that the HDRI content is not visible only dimmed and blurred. How to achieve that but in a way that the lighting is perserved?
Set your HDRi images to light your scene as you'd normally would.
Enable Environment on the render layers.
Make sure you enable Film Transparent:
Then use the output from the environment and blur it and darken it at will, then combine that result with your scene using an alpha over node.
That way the illumination for the scene will remain intact and the Background can be affected independently:
HDRi by GiantCowFilms
UPDATE: read this link to prevent a darker edge around the objects
Blurring the HDR image used as environment, can be done by manipulating the texture coordinates:
Note that you might need to change the strength used for the environment.
(for info on how this works please watch Bartel Skorupa's video Manipulate texture coordinates like a boss)
To soften/blur the HDRi use Photoshop or Gimp to blur the image (I suggest making a copy of the original ).
To control the intensity in the "Node Editor" select the "World" nodes (Attached is the most common set up I use).
Adjust the strength in the "Background" node (2).