Trade minister Ian McCartney, who piloted the minimum wage legislation through the Commons, said some Labour councils were "very badly run", and dominated by "cliques" with little engagement with the public.
Labour councillors and politicians have been engulfed in a string of financial scandals in northern England and Scotland.
Several "Old Labour" councils in the north of England lost ground in the local government elections in May. Labour stronghold Liverpool fell to the Liberal Democrats.
Mr McCartney - who has been given the job of revitalising the party's regional powerbase - said the problem was so serious that Labour risked losing areas like Liverpool "for a generation".
The answer in the city lay in transforming the party membership and cultivating a more open regime, Mr McCartney suggested.
Warning that Labour risked a "bloody nose" in the European elections next year, he said: "Some of our councils, quite frankly, are very badly run.
"The consequence of that is that they [electors] will not vote Conservative - they're rock solid Labour people - and so they're abstaining and that's a message to us to do something about it. I'm going to be responding to that."
Mr McCartney said: "There's something fundamentally wrong when you get turnouts of 10 per cent, 11 per cent, 12 per cent. And you have to do something about it, and one of the main reasons is that the party's disengaged on a regular basis with the community it's been elected to serve."
Several problems had been identified in the local party machines of traditionally loyal Labour areas, he told BBC1's On The Record.
"These areas just don't seem to attract members or enough new members," he said.
"The party's usually controlled by a small clique, and in local authority terms they have very poor relationships with the community which they serve."Reuse content