The policy due to be unveiled next week will not return grant-maintained schools to local authority control, but they will no longer be eligible for extra cash grants.
The sensitivity of the issue within the party means the document has not been put through the usual committee procedure and knowledge of the detail has been restricted to the offices of David Blunkett, the education spokesman, and party leader Tony Blair.
Policy formation has been made more difficult by the revelation earlier this year that Mr Blair has chosen a grant-maintained school, the London Oratory, for his son, Euan.
It is likely, however, that a future Labour government will increase the proportion of funding that local authorities delegate to schools from the present 85 per cent.
GM schools are likely to retain much of their autonomy, but they may have to agree to two additional governors nominated by the local authority. They may also have to abide by rules designed to ensure fair admissions policies and curtail partial selection.
The policy is likely to be presented as a new partnership between schools and local authorities - schools will get a larger proportion of the total budget and local authorities will have a strategic planning role. The problem for LEAs is that any reduction in the amount they can hold at the centre will restrict their ability to intervene in poorly-performing schools.
It is not expected that the Funding Agency for Schools, the Government-appointed quango which distributes money to grant-maintained schools and runs schools in areas where most schools have opted out, would survive under a Labour government.
Meanwhile, the apparent U-turn on GM schools announced this week by Doug McAvoy, general secretary of the National Union of Teachers, has provoked fury among his own executive, condemnation from council leaders and apparently irritated the Labour leadership, write Frances Rafferty and Clare Dean.
His disclosure to journalists on Monday that the union is prepared to drop its opposition to GM schools flew in the face of NUT policy and a showdown with members of the executive was expected at a meeting last night.
Two months ago the union's annual conference agreed a policy calling for abolition of GM school status and the Funding Agency for Schools and the return of opted-out schools to democratic local control. The union's president, John Bills, told the conference: "This union has a clear stance on grant-maintained schools. We oppose the policy and we expect to see them returned to their local authorities."
It was a meeting between Mr McAvoy and lobby correspondents organised by Lowe Bell, Mrs Thatcher's former public relations firm, which led to the headlines declaring the NUT's U-turn on GM schools. Mr McAvoy told them: "You cannot just easily get rid of GM schools and put them back into local education authorities."
One solution was to reduce LEAs' role to a core - special needs, curriculum advisers and home-to-school transport - and for the FAS to distribute what cash is left over to schools.
But if the union's softening stance on GM was meant to endear it to Labour before it announces its policy on opted-out schools, it failed both in timing and in substance. In particular, Mr McAvoy's proposal on the FAS has upset Labour. The next day the union denied a U-turn: three principles would have to be addressed before its opposition was lifted - equity of funding, democratic accountability and no admission via selection.
The apparent policy change came about after a survey of NUT members in opted-out schools, reported in last week's TES.
Mr McAvoy's policy statement was also condemned by local authority leaders, including Roy Pryke, education director of Kent, one of the authorities with the largest number of GM schools, and by Graham Lane, chair of the Association of Metropolitan Authorities.
The National Association of Schoolmasters Union of Women Teachers was quick to reaffirm its opposition to GMS.
* Local Schools Information, the LEA-funded advisory service, this week called for admissions to all state schools, including GM, to be handled by the LEA, for resources to be allocated on need and for governing bodies to include LEA-appointed people.