Blue smoke with a 2.5TD engine is not really a good sign no matter how you look at it because these engines are notoriously troublesome (especially the earlier versions). Problems such as cracked pistons and in some cases even cracked blocks would cause excessive crankcase pressure and force the engine to burn its own oil. Later models had a better designed (possibly thicker?) block with a better water jacket which almost solved these problems primarily caused by overheating.
No matter how you look at it, you are going to need to take the head off your engine to get a really good diagnoses of the problem. Whether or not you want to do this yourself or pay a garage to do it for you is entirely down to you, but I will walk you through everything that you need to know in order to diagnose and repair your engine, if it is in fact a problems being caused below the cylinder head.
Here's a quick test you can try:
1) Start the engine and get it up to temperature
2) Remove the oil level dipstick
3) Press your thumb over the tube for about 5 seconds
4) Remove your thumb quickly
Is there a lot of pressure build up, or does it absolutely launch oil out at you? If this is the case, you are looking at excessive crank case pressure.
The choice is down to you at this point. You can either pay a garage a lot of money to take your engine apart, or you can save yourself £400-£600 doing it yourself and it is really easy.
If you decide to take your engine apart yourself, here's a quick guide to get you going:
What you will need:
Tools:
1) Empty cardboard box / sections to make a component tidy
2) Socket set
3) Flat head screwdriver with long blade
4) Container for engine oil
New Parts:
1) Genuine cylinder head gasket
2) Rocker cover gasket
3) Engine oil
4) Anti freeze
Depending on whether or not you find the problem and the faulty parts, there will be extra components to buy, none of which are overly expensive,
BUT it could prove worthwhile, and actually cheaper to buy an old 200tdi engine and transplant it into your Defender, selling your old TD, or refurbishing it and then selling it for example.
The Process:
1) Disconnect the radiator pipes at the junction between the short pipe leaving the radiator, the long pipe which joins the engine / water pump and the long pipe which connects to the water reservoir / expansion tank, and allow all the coolant to drain.
2) Remove the fan cowling and any retaining nuts / bolts.
3) Drain one to two litres of your engine oil and save to filter and re-use.
4) Remove the wire assembly across the glow plugs (there is no need to remove the glow plugs however).
5) Remove each injector so that you can get to some of the headbolts. If they refuse to just pull out, gently prise them with the scew driver.
6) Remove the rocker cover.
7) Remove the rocker shaft (one complete assembly), and keep the bolts organised in a card tidy, they need to back in the same order.
8) Remove all eight pushrods and store them in order (they just slide out), checking that none of them are bent.
9) Remove the air intake / exhaust manifold.
10) Disconnect the oil return pipe on the drivers side of the head which is positioned almost against the bulkhead, just below the fuel filter housing.
11) Remove each headbolt and keep in order.
The head is now ready to be lifted off the engine block. There is no need for you to remove the fan or water pump or any other components, and you are now more than half way through dismantling your engine.
12) Lift the head off the engine block (it's heavy!). If it wont budge, gently prise it up or get extra help. The only thing holding it down is a short piece of rubber pipe and the old head gasket.
That's it, the head is off your engine. Make sure that you keep it safe, and protect the surface from chips and gouges etc.
What to check:
Clean each piston and examine the crown for splits or cracks. Also examine the bores for scoring which would suggest broken rings. If the piston head or the bore looks oily or extremely covered in more carbon than another, examine that bore more closely, because it could well be just the one cylinder which is causing the problem. Also check the head and valves for damage or large cracks which could be causing loss of compression.
If you get to this stage and you find problems, I will happily walk you through how to repair the engine further, none of which gets any harder.
God, that was a long post

-Pos