The warning by Baroness Castle, the former Cabinet minister, came as critics of Mr Blair's "control freakery" announced they would launch an alternative policy forum on Saturday after complaints that he has "closed down" debate inside the party.
Lady Castle attacked what she dubbed the "Millbank mafia" at the party's London headquarters for their "manipulation" of its policy-making machinery.
The veteran campaigner told a press conference that the "writing is on the wall" for the Government after Labour's defeat in last month's Euro elections. "If the activists are not inspired, no government in my view can survive," she said.
She predicted that the "Millbank mafia" would soon move to change the party's name from Labour. "You cannot have the democratic society which we stand for unless you have a democratic Labour Party."
Lady Castle will be among the speakers at a London conference on Saturday, born out of frustration among Labour's grassroots members at their inability to influence policy. Sixty-two MPs have defied Mr Blair by signing a declaration calling for the party to remain true to the values of its founders and rejecting a "reversion to 19th century Liberalism".