Senior Blairites believe that Gordon Brown is doomed to fail at the next election, and are urging David Miliband to start organising his leadership campaign now.
Supporters of Tony Blair are ready to rally round the Foreign Secretary to prepare to be Labour's first leader in opposition in 13 years. But they are against a challenge before polling day in two years because even if Mr Miliband wins a leadership battle, they calculate Labour is heading for defeat to David Cameron.
The dramatic moves come amid fears in Downing Street that a backbench rebellion last week over the 10p tax rate was part of an orchestrated plot by Blairites to destabilise Mr Brown.
The PM faces more difficulties today when the first extracts of a "score-settling memoir" by Lord Levy, Mr Blair's former fundraiser, are published in a national newspaper. The timing of the publication of Lord Levy's book, A Question of Honour – brought forward from the autumn – could not be worse for the Prime Minister.
At some cost to his authority, Mr Brown overcame the threat of a revolt in votes on the Finance Bill tomorrow by pledging compensation for those losing out from the abolition of the 10p band.
But Labour MPs are preparing to step up their challenge if the party suffers damaging defeats in the local elections on Thursday – including the possibility that Ken Livingstone could be defeated by Boris Johnson in the London mayoral contest.
Some Labour rebels remain angry that promised help for low-paid workers and pensioners hit by the abolition of the 10p tax band could be weakened because details of the Treasury package are vague.
There were even warnings that the political damage from the 10p row could be so widespread that some Labour voters are considering voting for the British National Party in Thursday's elections.
As recriminations over the revolt flew around Whitehall, there were rumours that the Prime Minister is considering sacking junior ministers who have dared to question his authority. Treasury minister Angela Eagle openly challenged Mr Brown over who would be affected by the 10p tax change at a meeting of Labour's National Executive Committee last month.
According to one of those present at the meeting on 20 March, the Prime Minister insisted that tax credits made the 10p band redundant and demanded to see payslips as evidence that people would lose out. He said pensioners would be helped by higher thresholds and increases to the winter fuel payment.
But Ms Eagle said that single childless workers cannot claim tax credits, and early retirees would lose around £2 a week.
Those loyal to Mr Brown believe they witnessed the unmistakable hand of the Blairites in undermining the Prime Minister. The former cabinet minister Stephen Byers was one of the MPs who warned before the U-turn that the abolition of the 10p band would be damaging because billions of pounds of tax credits went unclaimed.
Hilary Armstrong, the former chief whip and a close ally of Mr Blair, was accused of playing a crucial part in the rebellion.
Some MPs believe she was instrumental behind the scenes in whipping up support among backbenchers for Frank Field's amendment demanding compensation.
Tessa Jowell, the Blairite Olympics minister, warned that Labour had to unite around Mr Brown. She said: "Any divided party is likely to lose an election. What we have to demonstrate is that we are a united party and not a Westminster-bound party that is fighting like ferrets in a sack."
On Radio 4's Any Questions? the Secretary of State for Communities, Hazel Blears, said: "Most people agree that getting rid of the 10p [rate] is not the best way of tackling poverty. It is about increasing the minimum wage."
Privately, senior MPs are aghast at where the Labour Party stands when, as recently as January, the "political story" was that David Cameron had no substantial policies and could not build on his lead in the polls. Now the Tory leader needs to do nothing but jeer at Mr Brown for being a "loser not a leader" at Prime Minister's Questions.
The sense of defeatism in the Labour Party has triggered renewed talk of succession. The most likely scenario, say MPs, is that Mr Brown will hang on for another two years because no one is in a strong enough position to strike against him. But Labour faces losing the election, and the successor needs to gather support among MPs now to prepare for that moment, they say. Mr Miliband – who was forced to rule out standing a year ago after weeks of speculation that he might challenge Mr Brown – has been urged to organise for that eventuality now.
Two other scenarios have not been completely ruled out, however. One is that Mr Brown decides to step down of his own accord after the intense pressure of recent months. The other, which is less likely but still possible, is that the party rises against him in a coalition of the left and right.
None of the younger ministers, such as Mr Miliband, James Purnell or Andy Burnham, would risk standing, but the party could opt for one of two "John Major-style saviours of the party", Alan Johnson or Jack Straw, to see Labour to the next election. Already a meeting has been organised for two weeks after Thursday's local elections by Progress, an organisation on the party's centre right, under the heading "How Can Labour Win the South?". Speakers include Charles Clarke and John Denham, the Secretary of State for Universities. It reflects the real concerns among dozens of Labour MPs in the south that they will lose their seats at the next election because voters have no confidence in Mr Brown.
One MP said: "If Ken wins, it will take the sting out of the tail for the southern rebellion. But if Ken loses, Labour will be seen as a lost cause under Gordon and the beautiful south will rise up."
There are fears that major northern Labour council strongholds such as Bolton and Bury could swing from Labour to the Conservatives on Thursday.
There was one piece of good news yesterday when the tycoon at the centre of Labour's "proxy donors" scandal said he had been cleared of any wrongdoing. David Abrahams said the Metropolitan Police had confirmed that there were no grounds to proceed with a prosecution against him over more than £630,000 in donations which he channelled to the Labour Party through intermediaries. But it is unclear whether other Labour figures will face any further action.
In a sign of continued nervousness in Downing Street, it was claimed that Stephen Carter, Mr Brown's new communications and strategy director, has had conversations with "very senior" Tories.
With all this to contend with, the timing of Lord Levy's new book could hardly be more damaging for the Prime Minister. But the peer's friends denied that publication of his book had been brought forward to coincide with any alleged plot against Mr Brown.
Lord Levy's rabbi and close friend, Yitzchak Schochet, said the book would finally put to rest any rumours about his part in the honours saga, which dogged Mr Blair's final months in office. The peer was arrested twice during the police investigation but was cleared of all wrongdoing when the inquiry was dropped last July. His friends said the peer was a frequent "sounding board" for Mr Blair "letting off steam" about his Downing Street rival at the many dinners they attended together.
At the height of the police investigation, Lord Levy was one of the people close to Mr Blair who were furious that Mr Brown did not do more to help to defend the inner circle at No 10.
Now, say friends of the peer, it is the current Prime Minister who is in need of being rescued.
The hurdles on Brown's road ahead
Monday 28 April Finance Bill. Brown has averted a rebellion on abolition of the 10p tax rate, but Labour MPs could cause embarrassment.
Thursday 1 May Local and mayoral elections. Ken Livingstone could be defeated by Boris Johnson. Councils across England could also be lost.
Tuesday 6 May Compass debate. Westminster meeting of Labour MPs, "How Does Labour Win a Fourth Term?", will highlight discontent of the left.
Tuesday 13 May Progress debate. Centre-right group holds meeting, "How Can Labour Win in the South?", highlighting fears of southern MPs at risk of losing seats at next election.
June Counterterrorism Bill. Government faces serious rebellion over proposals to extend detention of terror suspects to 42 days.
June Crewe and Nantwich by-election. Labour could lose 7,078 majority held by the late Gwyneth Dunwoody. Labour still looking for a candidate.
September Cherie Blair's memoirs. Unlikely to cast Brown in a favourable light.
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