Unison leader Dave Prentis yesterday issued a thinly veiled attack on what he described as a "disunited" party although it was claimed the funding move was unrelated to Labour's union reform plans, triggered by claims members of Unite tried to rig the selection of a party candidate in Falkirk.
Unison is to cut its funding by £210,000 a year, blaming a fall in the number of Labour affiliates. The move means Labour has lost more than £1.2 million in the past week.
The announcement comes as Mr Miliband prepares to address trade union leaders at the TUC annual congress in Bournemouth tomorrow.
Labour had hoped the decision to drop an investigation into allegations of seat-fixing by the Unite union in Falkirk would ease tensions.
Last night deputy leader Harriet Harman pleaded with union leaders not to let the Tories capitalise amid the increasingly bitter row.
But her call appeared to land on deaf ears as unions lined up to criticise Labour's plans, announced in the wake of the Falkirk allegations, as "ill thought through" and dreamed up after a long night out.
Unions are furious Mr Miliband wants trade unionists to join Labour rather than affiliate through them. The move has already led the GMB to announce it is slashing its funding to the party to the tune of £1m.
Yesterday, Unite leader Len McCluskey appeared to offer an olive branch to Mr Miliband, saying he did not want an apology over the Falkirk row.
But others were less conciliatory, including Mr Prentis who also warned what happened in Australia, where Labor lost in a landslide defeat at the weekend, would happen "in this country if [Labour] doesn't get its act together".
Unison said the cut followed a correction process carried out every three years.
The union said ordinary members could choose to be affiliated to Labour or not, and that the numbers had fallen from 500,000 to 430,000.
Despite the Falkirk announcement, Mr Miliband has insisted he will press ahead with union reform.
But the stakes are high. Former Home Secretary David Blunkett yesterday warned that if he failed "the entire Labour project could be jeopardised".
In a separate development, Labour Falkirk members said they wanted Scottish Labour to launch its own investigation into how the local party was run.
Activists insist the local party is riddled with problems. Some claims are thought to centre on the local party's Unite-dominated executive as well as accusations of irregularities over how the local party is constituted.
There are also allegations executive members resigned because they were "frozen out" and not allowed to do their jobs, and that meetings with rank-and-file members were stopped, even before the party was placed in special measures earlier this summer.
Members also complained that at the last meeting in March, they were told to "shut up" when they raised issues. One described it as "a return to the days of militants busing in people to pack meetings and shout down members".
One local activist, a member of the Falkirk CLP for more than two decades, accused Labour leader Mr Miliband of doing a "dirty deal" over the seat-fixing accusations ahead of the TUC congress.
He added: "Scottish Labour need to investigate so we can have a functioning Labour Party in Falkirk again.
"The party in Scotland have been aware of this every step of the way. What has been happening in Falkirk has been a dirty little secret in Labour circles over the past year and now is the time for action."
He added he and a number of local party members had complained to the Scottish party HQ in Glasgow but had heard nothing. He said: "They say that no rules have been broken in the sense of people being signed up without their knowledge. But other rules have been broken."
Scottish Labour last night declined to comment but a senior source night denied that any such complaints had been received.
Linda Gow, another expected candidate, said there were "serious questions to answer" about why allegations of membership fixing by Unite union had been withdrawn and called for the original report into the claims to be published.
The fallout from seat fixing allegations continued amid claims whistleblowers were "sat on".