Ed Milband has delivered a short and sharp riposte to the leader of the Unite union, Len MccLuskey, who had criticised the Labour leadership for accepting that public sector pay freezes and cuts would probably have to be maintained if the party took power.
McCluskey said the move was a "victory for discredited Blairism" and warned the Labour leader that he risked putting the party leadership on a collision course with its core supporters.
In a sign that the row could be intensifying, the London Evening Standard reports that the GMB union is considering its relationship with Labour.
Union officials had privately warned that the move could lose Labour the next election, but McCluskey has used an article in the Guardian to voice their anger in public.
On Tuesday lunchtime Ed Miliband hit back, saying: “Len McCluskey is entitled to his views but he is wrong.
“I am changing the Labour Party so we can deliver fairness even when there is less money around and that requires tough decisions.
“It requires a tough decision to put the priority on jobs ahead of public sector pay.
“It also requires us to say we do believe the government is going too far, too fast with their cuts but we are not going to make specific promises to reverse those cuts unless we are absolutely sure that we know where the money is coming from.
“That is right, it is responsible and it is the way we are going to proceed.”
McCluskey strongly rejected the argument that pay restraint will help create jobs and he criticised the Labour Party for its failure to consult with trade unions before making the "shift" in policy.
The current split between the Labour leadership and the unions began at the weekend, when shadow chancellor Ed Balls made a keynote speech to the Fabian Society where he said a Labour government would not reverse the current public sector pay freeze.
The first trade union leaders knew of Balls' speech on Saturday was when they were contacted by the media for reaction.
McCluskey continued: "Notwithstanding that it impacts on millions of our members, it is hard to imagine the City being treated in such a cavalier way in relation to a change in banking policy.
"This confronts those of us who have supported Ed Miliband's bold attempt to move on from Blairism with a challenge. His leadership has been undermined as he is being dragged back into the swamp of bond market orthodoxy.
"Having won on the measures, 'new Labour' will likely come for the man sooner or later, and that way lies the destruction of the Labour Party as constituted, as well as certain general election defeat."
McCluskey also branded shadow ministers Liam Byrne, Jim Murphy, Stephen Twigg and Ed Balls as the "four horsemen of the austerity apocalypse" for endorsing "savage spending cuts".
Unite threw its weight behind Ed Miliband in the Labour leadership election and the unions now supply around 90% of the party's funds. This has lead accusations from some that Miliband is has to tow the union's line when setting out positions.
A spokesman for Miliband rejected McCluskey's attack. "Len McCluskey is wrong about our policy now and our approach for the future," the spokesman said.
"And Len McCluskey is wrong about what the last week showed for the Labour Party - a party united in it determination to pursue fairness even in tough times, make capitalism more responsible, and protect our priorities."
Labour deputy leader Harriet Harman said Labour's hand have been forced by the coalition's austerity measures: "When we left government the economy was beginning to grow and unemployment was beginning to fall but because they’ve squeezed the life out of the economy with their austerity cuts they are now in a position of having to continue with that public sector pay freeze. But what we don’t agree with is their proposals on regional pay bargaining, we don’t agree with their cuts in tax credit and we think they should make sure they do it as fairly as possible," she told BBC Radio 4's Today programme.