Tony Blair has decided that the Deputy Prime Minister should give up his job as head of the backbench leadership campaign team with the instruction to concentrate fully on transport policy in the run up to the next election.
Mr Prescott has agreed to relinquish responsibility for overseeing campaigning when the new post of party chairman - or similar job - is created, in order to spend more time in his department.
But the move, which is likely to be part of the Government reshuffle later this month, will be seen as a further snub to the Deputy Prime Minister who is already angry about Downing Street threats to clip his wings at the Department for the Environment, Transport and the Regions.
It follows the rift between Mr Blair and Mr Prescott over the role of the public services last week, when the Prime Minister criticised the reluctance of public sector workers to change, and his deputy lavished praise on this "civilising" section of society.
The plan also reflects growing concern at Number 10 that Mr Prescott's department has so far failed to deliver real change on an increasingly important issue. "We need to make transport a priority, so it makes sense if Prescott relinquishes something else," one aide to the Prime Minister said.
Mr Prescott's latest transport initiative is a plan for a "pothole tax" on the privatised utilities that dig up the country's roads.
Mr Prescott, one of Labour's most popular politicians with grassroots activists, is said to be happy to give up the campaigns brief. "If he feels that a structure is set up which is more appropriate then he will be fine with that," one friend said. "He will obviously still have a role in campaigning on the ground."
Mr Blair yesterday tried to draw a line under the rift with his deputy, emphasising that their views were "two sides of the same coin".
Labour strategists are discussing wide-ranging reforms to the relationship between the party and Government which are likely to mean campaigns coming under another job.
Mr Blair is expected to create a new party chairman's post - though he has not decided whether it will be of Cabinet rank.
The Prime Minister is also considering proposals to beef up the Cabinet Office, increase its links with Downing Street and give it more power to force through Government policy across Whitehall. Last week builders were at work in the Cabinet Office, which has a connecting door to Number 10, creating extra offices.
FURTHER REPORTS, PAGE 5