The controversial plans, which will be launched on Thursday, will increase the proportion of money going directly from the government to all state schools - giving those not opted out more autonomy .
David Blunkett, the party's education spokesman, will also propose a new "third option" which will allow all schools to draw some of their funding from charities, foundations, businesses or community groups, in the same way that church schools currently obtain support. Ultimately, opted-out schools may be encouraged to join them.
Tony Blair, the Labour leader, hopes that the plans will end the damaging row over the status of opted-out schools, fuelled by his decision to send his son, Euan, to the London Oratory. He will also rule out a return to selection.
Labour's proposals do mean that opted-out, or grant-maintained, schools face "transitional" changes. The local education authority will be permitted two governors - less than a majority - on their governing bodies.
They will also have to surrender some of their funds to local education authorities to cover areas such as special needs and peripatetic services. Currently opted-out schools receive up to 100 per cent of their funding direct from the government. Mr Blunkett is to negotiate the precise amounts they will need to surrender, but senior sources said there was flexibility.
But yesterday Sir Robert Balchin, chairman of the Grant-Maintained Schools Foundation said: "It is clear that Tony Blair means to turn the clock back and abolish grant-maintained schools giving them a status rather like the present LEA voluntary controlled schools."
Meanwhile the proportion of their grant which local education authority schools receive from the government will rise from 85 per cent to a minimum of 90 per cent, which will increase the autonomy of secondary schools.
Mr Blair also plans big reforms of local education authorities, whose role will change drastically as a result of the reduction in funding they administer.
The Labour leader wants councils to concentrate on levering up standards in their areas.
The Audit Commission will be given a new role as an inspector of local education authorities. Ofsted, the Office for Standards in Education, will examine the efficiency of councils in raising standards in their area.
All LEAs will have to introduce a Strategic Education Development Plan, which will have input from new education networks bringing together parents, governors, business interests and voluntary bodies.
Education authorities will also be responsible for planning the number of school places in their region. Disputes will go to local public inquiry.
After the row over opted-out schools, Mr Blair hopes to be able to turn the debate away from the specifics of funding issues, and towards the raising of standards. The document will go to Labour's Joint Policy Forum this week, ahead of a speech on education by the Labour leader at London University on Friday.
The party's decision to create a third category of schools funding will simplify the current structure. But it also opens the door to specialist schools, such as those started up under the Government's "city technology colleges" initiative, being created under a Labour government.
Mr Blair will emphasise in his speech on Friday that LEAs should not control schools, but that they should become agencies and advocates of improving standards in all schools. Success in improving pupils' performance should be their "judge and jury", he will say.
The Labour leader will argue that the old left emphasised support for schools without sufficient pressure on them to succeed, and the New Right thinks the solution is pressure without support. Labour, however, believes that both are vital. He will back targets for improvement, publication of performance data, school inspection, teacher appraisal and intervention in schools which are failing.
Questions and answers: Page 10Reuse content