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I would just paint right over the red area using the blue-white color immediately surrounding it.  Select the color of the surrounding area often so that it blends well on all sides.  Maybe apply a gradient making it a bit darker at the bottom.  When you feel like that part is done, make a selection of the (former) red area and include a good bit of extra space around it.  Copy that selection to a new layer and then give it a healthy blur to match the blurriness that's already there.

Forgot to add...  do all of this on new layers.  Always leave the original photo untouched on the bottom layer.