As many as 100 Labour MPs could create a breakaway group within the party if Jeremy Corbyn stays on as leader following a heavy general election defeat, according to reports.
The move would be to put pressure on Corbyn to step down after his comments that he would remain as leader regardless of how his party performed on 8 June.
Although the dissidents would not create a new party, the faction would make it near impossible for the left-winger to form a viable opposition to the government.
A senior Labour Party source told the Telegraph: "There will be a bloodletting in July. Sensible people are going to walk away.
"There is talk of a realignment because we can't allow this to continue."
Dan Jarvis, Yvette Cooper and Keir Starmer have been suggested as possible leaders of the breakaway group, said the source, but there was no indication that they had been approached or involved in talks.
If Corbyn stepped down after any defeat, the MPs would return to the fold.
"The Labour Party has got to appeal to moderate people who have got moderate views and that is the majority of the people in this country," added the insider.
In spite of the reports, Corbyn has bounced back in the polls, but still lags behind Prime Minister Theresa May by 16 points.
The alleged plot comes as Labour announced a plan to increase the total of per-pupil spending in schools by £6bn ($7.77bn). It would be funded by increases in corporation tax.
Corbyn plans to increase the rate to 26% after the Conservatives cut it from 28% in 2010 to 19%. It is due to come down to 17% by 2020.
Despite the proposed increase, Labour's corporation tax rate would still be the lowest among G7 countries.
"We will reverse the Conservatives' tax giveaways to big business and put money back where it belongs – in our schools, our colleges and our communities," Corbyn will say at an event in Leeds today (Wednesday 10 May).