Blunt appeared on an episode of Sesame Street which aired on 14 November 2007, singing about triangles to the tune of "You're Beautiful". A parody of "You're Beautiful" titled "You're Pitiful" was recorded by Weird Al Yankovic. He gave personal permission for this parody to be included on a Weird Al album, but Atlantic Records, his label, stepped in to forbid the commercial release of the song. Weird Al has since made the song available as a free MP3 download on his website. In a request by Yankovic to include the song on an upcoming compilation CD, Blunt's manager replied via email, "Thanks for your email, but both James and I will never approve this parody to be released on any label."
Blunt's second studio album, All the Lost Souls, was released on 17 September 2007 in the United Kingdom and one day later in North America. It sold 65,000 units in its first week, and was certified gold in the UK after only four days. By the end of January 2008, the album had sold 600,000 copies in the UK, and 4.5 million copies internationally. Blunt completed the album's songs at his home in Ibiza in the winter of 2006–2007. He performed five of the ten album tracks during his 2005–2006 tours; lyrics, melodies, and harmonies were refined for the studio recording, on which his touring band played and Tom Rothrock worked as producer.
Blunt collaborated twice during this album cycle. In late 2007, he worked with French rapper Sinik. They released "Je Réalise", which took elements of Blunt's song "I'll Take Everything", which hit the top three in France. On 14 November 2008, "Primavera in anticipo", Laura Pausini's new album, was released. The title track is a duet with Blunt. The album reached the Number one in Italy.
Throughout 2007 and 2008, Blunt went on his second world tour, including a performance in London's O2 Arena. In July and August 2008, he supported Sheryl Crow on a 25-date tour along with Toots and the Maytals. On 24 November 2008, All The Lost Souls was re-released as a deluxe edition, with new album artwork, new single "Love, Love, Love" and the documentary James Blunt: Return to Kosovo.
Blunt primarily resides on the island of Ibiza. He also owns a chalet in the Swiss town of Verbier, which he purchased in February 2007, and has a ski lift named after him there. In 2012, Blunt opened a restaurant alongside Carl Fogarty and Lawrence Dallaglio at the top of the chairlift called La Vache. The same year, he was one of six victims of the News International phone hacking affair, and filed for damages in a civil case.
Blunt also supports environmental causes. He screened the trailer for An Inconvenient Truth at his concerts, and for each advance sales concert ticket purchased through his designated website, a tree is planted. On 7 July 2007, he performed at the Live Earth concert at Wembley Stadium, London. He contributed to the charity single, "Everybody Hurts" in aid of the 2010 Haiti earthquake appeal.