The Labour Party is to refer a report into allegations of irregularities in the selection of an election candidate in Falkirk to the police.
Labour leader Ed Miliband has said an internal inquiry into events show people were being signed up to the party without their knowledge.
Two local party members have been suspended and Labour HQ has stepped in to run the selection race.
Unite has said the report was a "stitch up" designed to smear the union.
Its general secretary Len McCluskey denies claims his union - one of Labour's biggest financial backers - tried to rig the contest to select a general election candidate in Falkirk and said on Thursday he had "no trust" in the Labour Party following the row.
But Mr Miliband has dismissed his smear claims as "total nonsense" and said "instead of defending these practices Len McCluskey should be facing up to what happened in Falkirk".
"The Labour Party I lead will select its candidates in a fair and transparent way. We will act without fear or favour," said Mr Miliband in a statement.
"He should not be defending the machine politics involving bad practice and malpractice that went on there, he should be facing up to it."
'Good name'Mr Miliband sought to assert his authority, telling the union chief: "Let nobody be in any doubt.
"There is only going to be one outcome to this: the Labour Party will act in a way that upholds the integrity of our party, the integrity of our party members and the integrity of ordinary trade union members.
"I will not allow the good name of the Labour Party to be undermined by the behaviour of a few individuals."
The row between Labour and its biggest union backer centres around claims of vote rigging in the process to replace Eric Joyce as Labour's candidate in Falkirk for the 2015 general election.
It has already seen the party step in to run the process centrally and suspend rules under which unions could sign up members to the Labour Party and pay the fees on their behalf.
On Thursday, Labour's general election co-ordinator Tom Watson, whose office manager Karie Murphy was Unite's preferred candidate in Falkirk, quit for the "future unity" of the party. Ms Murphy and Falkirk party chairman Stephen Deans were suspended by the party.
'A stitch-up'BBC political editor Nick Robinson said the row was actually about the future composition of the Labour Party and what sort of people became the party's MPs.
Unite's stated strategy is to "shift the balance in the party away from middle class academics and professionals towards people who have actually represented workers and fought the boss".
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Nick Robinson said Blairites within the party believed there was an organised, heavily-funded campaign to try to rig candidate selection in a particular direction.
But in a letter to Labour's general secretary, Mr McCluskey said the union had "nothing whatsoever to do" with the alleged attempt to sign 100 or more members to the constituency party without their knowledge.
"The report has been used to smear Unite and its members," he said. "It is noteworthy that members of the shadow cabinet have been in the lead in initiating this attack."
Mr McCluskey said Labour's internal investigation was "simply a stitch-up" designed to "produce some evidence, however threadbare, to justify pre-determined decisions". He demanded an independent inquiry into the events in Falkirk.
"I, however, 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."
Brian Wheeler Political reporter, BBC News
Ed Miliband has fought hard to shake-off the "Red Ed" tag - the idea that he is a puppet of the trade unions. And until recently it looked like he was succeeding.
The row over candidate selection in Falkirk is in danger of undoing all of that, to David Cameron's evident delight.
But it also a battle for the soul of the Labour Party.
Unite is determined to end the domination of what it sees as an out-of-touch, Oxbridge-educated elite on the Labour benches.
It wants to return the Labour Party to its working class roots, by getting its activists selected in winnable seats.
How Mr Miliband defuses the row with Unite's Len McCluskey - and it is far from clear at this stage how that can be achieved - will decide a lot more than who stands for Labour in Falkirk in 2015.
Mr Watson, who resigned on Thursday from his shadow cabinet role as election co-ordinator, told BBC Radio WM that he had been thinking about it for a few months but the "fuss" about the Falkirk selection had persuaded him it was time to move on.
He repeated his belief that some within the party had never forgiven him for resigning as a junior defence minister in 2006 and calling for Tony Blair to step down as prime minister.
"I kept reading in papers that there were unattributed briefings from the shadow cabinet... There was clearly a problem with some of my colleagues around the shadow cabinet table and obviously I do accept that.
"It was a big thing I did in 2006. But what I don't want to do is make that a problem... So, no hard feelings, I'm off."
He said he did not know what had happened in Falkirk but "clearly something had gone wrong" that had to be sorted out.
However he added: "I think David Cameron's portrayal of the situation, that everyone is in hock to Len McCluskey, is just not true."
But David Cameron said it was now "quite clear the trade unions have far too much control over Labour".
"This has happened on Ed Miliband's watch. It is something of a scandal that is unfolding and he badly needs to grip it," he said.
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