Admiral Hortaio Nelson, better known as Lord Nelson, was blinded in one eye early in his Royal Navy career. In 1801, during the seige of Copenhagen Lord Nelson, second in command of the English fleet, was ordered by his superior Admiral Sir Hyde Parker to withdraw forces by flag signals. When made aware of such signals, Nelson deliberately put the telescope to his blind eye and said he could see no such signal. Thus, he ignored the order as if he had not seen it and ordered his forces to continue the attack. Luckily for him, English won the day.
Supposedly he remarked later that he had a blind eye and sometimes had a right to use it! :)
Even if Nelson did not exactly use the phrase "turn a blind eye" or invent it, the phrase is based on this event in his life.
Sources: Wikipedia, http://www.phrases.org.uk/
Image: LIFE Images