Eric Pickles insists rules surrounding councillors' declarations of interest will be urgently reviewed after Tory claims that Labour candidates have to be trade union members.
The Communities Secretary said people now wonder whether their councillors are working for them or for trade union bosses.
The issue was raised in the Commons by Conservative Party vice-chairman Bob Neill, who has written to Metropolitan Police Commissioner Sir Bernard Hogan-Howe asking him to look into allegations of possible fraud relating to Ilford North and Lewisham Deptford, both in Greater London.
Mr Neill made the call after Labour handed evidence to police in Scotland about claims that the Unite union tried to fix the result of a candidate selection in Falkirk by packing the constituency with members, whose subscriptions it paid.
In the Commons today, Mr Neill asked Mr Pickles: "Might you think it's a good time to review the rules on the declarations of councillors' interests given it's now compulsory for all Labour council candidates to be a member of a trade union?"
Mr Pickles replied: "I am shocked to hear that information and people now wonder whether or not councillors are working for their residents or for their trade union bosses. And I shall review the matter as a matter of urgency."
In his letter to the Met Police, Mr Neill cited allegations that in Ilford North Unite were offering their members free Labour Party membership in exchange for attending a meeting with general secretary Len McCluskey.
He also quoted claims from a Labour London activist that the union was "bankrolling" a number of campaigns, including in Lewisham Deptford.
A Labour source yesterday said the party had no evidence of possible criminal behaviour anywhere outside Falkirk. The source called Mr Neill's actions a "silly political stunt" and asked him to produce evidence or stop wasting police time.