The Prime Minister believes that extending PR to town hall elections would end the "one-party states" in some Labour strongholds, which have sparked allegations of mismanagement and corruption.
The Downing Street policy unit is pressing for the move to be included in a Bill to modernise local government to be included in the Queen's Speech in November, which allows councils to have elected mayors. Mr Blair's aides believe the move would be a "gesture of goodwill" to Charles Kennedy, the new leader of the Liberal Democrats, and help him win his party's support for continuing Paddy Ashdown's policy of close co-operation with Labour.
But Gordon Brown, the Chancellor, is said to have reservations, and the disclosure that both he and Mr Prescott are ready to snub the Liberal Democrats will infuriate activists meeting this week at Harrogate for the party conference. Indeed, party members from Sheffield - the former Labour stronghold taken by the Liberal Democrats this year - will be stepping up the demands for PR in town halls.
Mr Prescott, whose department has responsibility for local government, has the backing of rank-and-file Labour supporters who are planning to oppose the move at the party's annual conference next week. Liberal Democrat sources said they may now have to wait until after the election for Mr Prescott to be moved. "We will press for it to be included in Labour's election manifesto," said one source.
Mr Blair expressed support for the idea at a private meeting with pro- PR Labour MPs, raising their hopes of legislation. It has the backing of Jack Straw, the Home Secretary, who opposes reform to the voting system for the House of Commons.
Mr Prescott fears it would be the "thin end of the wedge" for PR at Westminster. His allies say the pressure for reform is coming from the "SDP tendency" in No 10 who have always been committed to PR.
Trade unions, MPs and activists will join forces at the Labour conference to kill off the idea with an emergency motion rejecting PR.
"There are real fears that Mr Blair will offer this as a sweetener to Charles Kennedy," one union official said yesterday. "We are determined to stop it in its tracks."