The war for Gordon's ear

Plotting his fightback at Chequers this weekend, Gordon Brown is at the centre of the most crucial battle over the direction of Labour since Tony Blair won the leadership in 1994.

Blairites are pressing him to cut spending and slash taxes, while MPs on the traditional left wing are urging him to revive Labour's electoral hopes with a dose of old fashioned socialism.

The battle – nothing less than a tug-of-war for the soul of the Labour Party – is one which some in the Labour ranks wanted as early as last year when Mr Blair stepped down, but which has, until now, remained muted for lack of a contender who could muster enough votes to openly challenge Mr Brown in a leadership contest.

That time is long gone. The debate is now breaking out with a vengeance, with some ministers privately fearing it could tear apart the winning coalition that Mr Blair managed to hold together for more than a decade. So far, it has been largely limited to backbenchers. But the battle of ideas must soon involve Cabinet ministers, who have stayed out of the debacle since Labour's drubbing at the Crewe and Nantwich by-election. And, while there is no plan to send a delegation to force out Mr Brown, the possibility that he could quit by the end of the year is not being ruled out by Cabinet colleagues.

The focus for now is on policy. Ten Labour MPs, including five former ministers and three Parliamentary Private Secretaries, used the Blairite Progress group to urge action by Mr Brown on the rising prices of food, petrol and energy that they say are creating a new class of poor in Britain.

Mr Brown was first alerted to this danger by Deborah Mattinson, his opinion poll guru, who found this year that swing-voters were beginning to complain about the rising price of a loaf of bread. Rising prices on top of the credit crunch have spread fears of repossession among ordinary householders. Yesterday, Steven McCabe, who ran Labour'sby-election campaign in Crewe, said the voters were "fed up" with rising prices and that "Labour couldn't claim to be on their side".

This week, Alistair Darling, the Chancellor, signalled that he is almost certain to cancel the 2p-a-litre rise in fuel duty in the Autumn, unless oil prices crash in the meantime. But Blairites want him to go much further than that. Denis MacShane, the former minister for Europe, called this week for Mr Brown to slash back the size of the state to make room for tax cuts.

Mr Brown is being urged to take radical action by imposing a windfall profits tax on the oil companies, who stand to make billions of dollars out of oil soaring to $135 (£68) a barrel. It was not raised when the Prime Minister and the Chancellor sat down with the oil barons in Scotland this week to discuss ways of increasing production in the North Sea to help reduce prices, but it remains an option. It would give Mr Brown room for manoeuvre to finance further cuts in taxes, and it would be popular with most UK voters.

The Bennite rump in the Campaign Group, which has gained strength from Mr Brown's failures, is backing a left-wing "wish list" of motions circulating around the constituency Labour parties for the annual party conference in Manchester in September.

They call for the withdrawal of troops from Iraq and Afghanistan, the cancellation of the replacement for the Trident nuclear weapon system, a return to the mass building of council houses to rent, state ownership of private railway companies, and an end to the expansion of private companies in the NHS.

Public sector unions are also beginning to flex their muscles. Yesterday, health workers rejected a government pay offer, threatening strike action. They are demanding equal rights for agency workers to stop them undercutting the pay of their members, legislation opening bosses to charges of "corporate manslaughter" and bigger pay rises.

The GMB union, which gives more than £1m to Labour each year, will discuss disaffiliating from the party at its own annual conference next week. Public sector unions are balloting members for strike action against their pay rises being held below inflation.

On Monday night, Mr Brown comes face-to-face with the Parliamentary Labour Party for the first time since the devastating Crewe and Nantwich by-election. He is considering using the event, at which the Home Secretary, Jacqui Smith, is due to appeal for a compromise on the imminent terror Bill, to reassert his own authority. As he found recently on the issue of embryo research, taking the lead on "42 days" and winning a closely-fought vote in the Commons could give him the Blairite touch he desperately needs.

Pulling to the Left

*Fiscal policy: The Compass group of left-of-centre MPs want to 'open up the issue of tax rates at the top'.

*Green taxes: Labour MPs oppose rise in vehicle excise duty for cars registered from 2001.

*Housing: Labour left-wingers are calling for a return to mass council house-building.

*Iraq and Afghanistan: John McDonnell, leader of the Campaign Group, is backing a 'troops out' call.

*Leadership: Labour backbenchers are divided in their opinions as to who, if anyone, should replace Mr Brown.

Pulilng to the Right

*Fiscal policy: Progress, a Blairite think-tank, is calling for cuts in fuel duty and stamp duty.

*Green taxes: The same group is calling for a 'significant tax' on the most polluting vehicles.

*Housing: Calls for cuts in taxes on first-time homebuyers, support for mortgagerepayments and help to self-build.

*Iraq and Afghanistan: No call yet for an immediate withdrawal, but the move could prove popular.

*Leadership: Openly talking about David Miliband taking over.