I think the wording of Blur makes it clear that it's not supposed to be used to interrupt an action on it's own. However, I don't personally have a problem using Enchantment Transfusion to turn an already revealed Blur into an interrupt. It's costing you an extra spell, an extra action, and 3 extra mana. That seems like a fair price for the utility of interrupting a single action.
Strictly speaking from the rules, there's nothing currently preventing such a move. No errata such as that which you proposed yet exists. So, it would seem that option 1 would be correct. You've already chosen your target, so it's too late to choose another (see addendum below). Since your target is no longer a legal target, the spell fails and is cancelled.
Addendum regarding Option 2: Mana Siphon doesn't choose a target mage until the Resolve Spell Step (the spell itself is targeting a zone, it is the effect of the spell that targets a mage), which is why the Divine Intervention trick works. Similarly, sweeping doesn't choose it's secondary target until after it finishes attacking the first target (luckily the second target is now optional). In order to force someone to choose a different target, possibly making them target themselves, you have to make their desired target illegal before they've actually had a chance to officially target it. For most spells, this means you must make the thing an illegal target before Step 1: Cast Spell, which will probably result in them not casting the spell at all rather than casting it on an undesirable target. Once they've officially selected a target, it is impossible to change it, much less force them to change it.
