Labour is handing its investigation into alleged irregularities over the selection of an election candidate in Falkirk to the police, according to Sky sources.
Facing potentially the biggest crisis of his Labour leadership, Ed Miliband has told Unite boss Len McCluskey to face up to "malpractice" over the selection of MPs.
Mr Miliband insisted the union - Labour's biggest donor - should not be defending the "machine politics" allegedly used in an attempt to swing the selection for its favoured candidate in Falkirk.
It is claimed Unite crammed the Scottish constituency with 100 or more members whose subscriptions were paid by the union, some of them without their knowledge.
Earlier, Mr McCluskey said he had "no trust" in the the party's handling of the Falkirk issue, after Mr Miliband's chief election coordinator resigned and two party members were suspended.
Mr Watson, who has close links with Unite, stepped down from the shadow cabinet on Thursday, saying that he was quitting to safeguard "the unity of the party".
Mr McCluskey has demanded an independent inquiry, accusing the party of "smears" over claims that it sought to swing the contest.
But Mr Miliband dismissed the union boss's smear claim as "total nonsense" and said Mr McCluskey should "face up to what people within your union were doing".
Tom Watson has resigned Speaking at a charity event in London, Mr Miliband said: "The Labour Party I lead will select its candidates in a fair and transparent way.
"We will act without fear or favour.
"Instead of defending what happened in Falkirk, Len McCluskey should be facing up to his responsibilities.
"He should not be defending the machine politics involving bad practice and malpractice that went on there, he should be facing up to it.
"We had members being signed up without their knowledge, bad practice, malpractice and, frankly, instead of defending that kind of thing, Len McCluskey should be condemning it."
In an incendiary letter to Labour's general secretary, Mr McCluskey said a party inquiry into claims the union tried to stitch up candidate selection was a "disgrace".
"I ... am obliged to uphold the integrity of Unite, and I can no longer do so on the basis of going along with the activities of a Labour Party administration in which I can place no trust," Mr McCluskey wrote.
"I will therefore be publicly proposing that an independent inquiry be held into all circumstances relating to Falkirk CLP and the conduct of all parties involved."
Mr McCluskey also complained that he had not been shown the "flimsy" internal inquiry report which he said "has been used to smear Unite and its members".
"Even if the allegations of people being signed up to the party without their knowledge were true, this had nothing whatsoever to do with my union," he said.
"It is noteworthy that members of the shadow cabinet have been in the lead in initiating this attack upon Unite. Have they had sight of this report while I, the leader of the union put in the frame, has not had the courtesy of a copy?"
Conservatives have capitalised on the Falkirk row, with David Cameron repeatedly goading Mr Miliband over the influence allegedly wielded by Unite, which has donated more than £8m to Labour since he became leader.
"It's quite clear the trade unions have far too much control over Labour," Mr Cameron said.
"This has happened on Ed Miliband's watch. It is something of a scandal that is unfolding and he badly needs to grip it."
Sky's deputy political editor Joey Jones said: "Labour badly needs some time away from the parliamentary hothouse to lick its wounds and try to restore some order to its selection procedures.
"However, the Tories will take every opportunity to crow at the opposition's misery."
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