An advice note distributed by the party's national executive committee says tenants should be given a free, but informed, choice over who manages their homes.
It also says that more estate management boards and tenant management co-operatives should be set up to help tenants understand the constraints under which councils operate.
The note adds that Labour groups should make clear the party's view that tenants, rather than the Government, should decide who manages their homes.
Clive Soley, shadow housing minister, said: 'Government proposals show they are not prepared to trust tenants.
'I challenge the Government to stand by its pre-election promise in the Citizen's Charter to allow tenants a real say in who manages their homes . . . We are advising Labour councils that tenants should have the right to decide who manages their homes.'
Mr Soley added: 'If the services do not come up to scratch, they should have a free, and informed, choice in selecting a different managing agent - including a neighbouring council if they wish.'