I have found a really useful plugin in Wordpress MU for making a blog private. Sometimes, committees need a way to share information away from home and they don’t want everything posted to be known by the world. Rather than using the “Password protect post” option, there is a way to only allow registered users that are members of the blog to view the post.

By default, the privacy options in Wordpress MU is limited to 1) Public, allow search engines 2) Public, don’t allow search engines.

http://wpmudev.org/project/More-Privacy-Options

This plugin adds functionality:
3) I would like my blog to be visible only to registered users from blog community
4) I would like my blog to be visible to registered members of this blog
5) I would like my blog to be visible only to administrators

To install:
1) Download the plugin file.
2) Copy the plugin file to the plugin folder in Wordpress MU
3) In the Plugin interface in Wordpress MU, activate the “More Privacy Options” Plugin
4) In the Privacy option of the blog (under Settings -> Privacy) you will have the additional privacy options. Select the “I would like my blog to be visible to registered members of this blog
I would like my blog to be visible to registered members of this blog” option.
5) Note: AFAIK, this is on a site by site basis, so will need to enable this plugin for each blog you want to add it to.