The breakaway group is preparing to split the Conservative Party's vote by contesting the seat left vacant by the conviction of the Labour MP Fiona Jones of election fraud.
Sources within the pro-euro Conservative Party have told The Independent that the by-election is "too good an opportunity to miss" to get across its message. The rebel grouping, which recently had its title officially approved despite protests from Conservative Central Office, was formed this year by former Tory MEPs who resigned in protest at Mr Hague's hard line on the single currency.
Faced with a Labour majority of just over 3,000, the Conservatives would need only a small swing to win back a seat they had held for decades until 1997. The Tories were also hoping that the absence of the anti-federalist Referendum Party would give them an edge.
But recent polls have shown that breakaway pro-European Tory candidates could attract significant support and a rebel candidate could take enough votes from the official Conservatives for a Labour victory.
Michael Ancram, the Conservative Party chairman, admitted recently that a "wrecking campaign" by pro-euro rebels could split the Tory vote in the June European elections.
No date has been set for the Newark poll, but Labour sources have suggested June 10 - to coincide with the European elections and increase Tory division on Europe. As the rebel Tories are already fielding candidates in the MEP elections, they have now said they would "definitely" contest the Nottinghamshire poll if held on the same day. Even if the Government opts for May 6, the date of local council elections, the breakaway group is poised to put up a candidate simply to raise its profile.
John Stevens, who helped to found the new party with his fellow MEP Brendan Donnelly, has already warned the Newark party not to use Eurosceptic language or tactics in the by-election. "If William Hague chooses to make the euro the real issue in the by-election by pursuing a Eurosceptic agenda and bad-mouthing Ken Clarke, then he's got a fight on his hands," a pro- euro source said.
Ms Jones was forced to quit last month when a court found her guilty of breaching limits on campaign spending in the 1997 general election. Last week, the Tories selected Richard Alexander, MP for Newark for 18 years until he lost to Ms Jones, as their official candidate for the constituency.
Mr Stevens has written to the chairman of the Newark Conservative Association, warning it not to use Eurosceptic language in the by-election campaign. He said that as a Nottingham association, the local party should endorse the right of the nearby MP and former chancellor Kenneth Clarke "and those who think like him" to advocate his pro-euro views.
Mr Clarke was proposing a policy on the euro that he believed to be right, even though it was contrary to the current official line, Mr Stevens wrote.