You can manually add the blogs by entering their URLs or you can select from your Google Reader subscriptions. To add the widget to a Blogger blog, you need to go to Blogger in Draft, click on the Layout section corresponding to the blog and add the "Blog List" page element. You can't add the widget for blogs that still use the classic templates, like this blog.
Google Reader already lets you create a blogroll from any public tag, but Blogger's widget is more customizable.
In other Blogger-related news, the comment page make it more obvious that you can sign in using an OpenID and Blogger enabled pagination for posts with more than 200 comments.