Fix the problem that is creating the water damage and causing the plaster to blister. Ensure that the plaster has had sufficient time to dry before you start repairs.
Pop any blister bubbles in the plaster. Scrape off all peeling paint and blistered plaster using a putty knife. Remove all loose debris from the wall or ceiling.
Wash the water-damaged area thoroughly with a bleach and water mixture. Create the mixture to the equivalent of one part bleach and 10 parts water. This will disinfect the damaged area and kill any growing mold. Allow the area to thoroughly dry.
Apply a stain blocking paint, which can usually be found at your local hardware store. This will work as a primer to keep the discoloration from showing through any paint. Follow manufacturer's directions to complete the application. Allow the area to thoroughly dry.
Smooth over the area with plaster. Apply plaster to the wall or ceiling with a putty knife. Fill in any holes and peeled plaster from the blisters.
Use the putty knife to smooth down the plaster. Apply a second coat, if needed. Allow the plaster to thoroughly dry.
Apply paint or wallpaper to the finished area.