A few years ago I painted my grey brick oil flue with white drylock. A year or so later 1in thick chunks about 8 by 10in started falling off. I assume this happened because the blocks couldn't breathe. Can I fix this with some type of mortar?

I don' think the drylock caused the problem and your issue may be much bigger than you picture. I'd get 3 bids from masons, it may need retucking ot even some brick replacements. Once you have the bids you can decide if you want to try it yourself