Im thinking about porting this program to .DMG (OSX).
Yes, in that case you can't use the default alphablend functions of Windows.
In that case I think we're back to drawing an alphablended image on the panel.
In attached example I used the CopyRect that GetMem used originally.
(Now it "only" needs to be adjusted that the copied image is blurred.)
(Another option could be to use a second image to be copied over this one with alpha-blending. The image could be small and stretched so you don't have to redraw it. Drawing the backgrounded panelImage should be enough.)