Gordon Brown disclosed last night that he is prepared to bow to growing political pressure from Scotland and give the Holyrood Parliament in Edinburgh increased tax-raising powers.

The Prime Minister, who within the next few weeks faces a crucial by-election in Glenrothes, neighbouring his own seat in Fife, made dramatic move in a speech to businessmen in Glasgow. Mr Brown argued that devolution in Scotland had worked but, in what will be seen as a massive political U-turn, added that there was now a “problem” and devolution had to be “developed”.

He said: “While there have been good reasons why this is so, the Scottish Parliament is wholly accountable for the budget it spends but not for the size of its budget. And that budget is not linked to the success of the Scottish economy.”

Until now Mr Brown has, publicly at least, been against giving Holyrood any tax powers beyond its present ability to increase or lower the basic rate of income tax by 3p in the pound, a power never used. He has always maintained that Scotland was better served within a unified British tax and benefits structure, with an annual block grant being given to Holyrood by the Treasury.

His about-turn represents a gamble that giving more powers to Holyrood will strengthen the Union and counter rather than embolden the resurgent Scottish Nationalists. The policy switch may be central to the Glenrothes by-election campaign.

Mr Brown’s intervention last night will change the political terrain in Scotland. He rejected the notion of “unthinking opposition” to more tax powers and appeared to agree that Holyrood must have more control over the Scottish economy and be more accountable for raising the £30 billion it spends annually.

His speech came after Charles Clarke, the former Home Secretary, sought to make winning the Glenrothes by-election Mr Brown’s last chance of salvaging his leadership, setting him a two-month deadline to show “decisiveness and clarity”.

Stepping up his attack on the Prime Minister, Mr Clarke urged him to improve or “stand down with honour”. His wounding attack further disrupted a week in which Mr Brown had hoped to mount a political fightback.

However, Mr Clarke ended the day an isolated figure as no other Labour MPs joined him in open revolt. After months of private plotting and anonymous briefing the former Home Secretary became the first senior MP to break cover with a warning that the Labour Party would not allow Mr Brown to lead them to “utter destruction” at the next general election.

He said that it would be better if the Prime Minister stood down rather than force a challenge. “The best for the country would be if Gordon made his own mind up. That is, after all, what a whole string of national and party leaders have done in past decades – decided that there came a point where it was better for them to go with honour and I think that would be far and away the best,” he said. “In the event that didn’t happen, then I think it would be down principally to the Cabinet to decide how to proceed and what to do, and to do that in an expeditious way.”

Mr Clarke claimed that “many, many, many” Labour figures shared his worries that Labour could not win the next election under Mr Brown. He admitted, however, that he had failed to persuade any members of the Cabinet to urge the Prime Minister to quit.

“There isn’t a view at the moment that they should go and speak to Gordon in the way that I have described.”

In an apparent attempt to shame Labour MPs into supporting a revolt against Mr Brown, Mr Clarke said that it would be “disreputable” for Labour figures to succumb to fatalism.

Other critics of Mr Brown struggled to conceal their dismay at the intervention and none joined Mr Clarke. “I think what Charles has said will strike a chord with many people,” a former Cabinet minister said, before adding, “I just don’t believe the time is right.”

His comments were dismissed by Ed Balls, the Children’s Secretary, a key ally of Mr Brown, who said that Mr Clarke was well known as a long-standing critic of the Prime Minister.

“It’s not the first time Charles has made those kind of comments. I think it’s Charles being Charles. I don’t think that’s where the debate will be when we get to the next general election,” he said.

Mr Brown will know that the absence of a groundswell of support for Mr Clarke does not mean that the danger to his leadership has passed. Mr Clarke’s deadline of “months” expires with the Glenrothes by-election, which is expected in late October or early November. If voters again punish Labour despite Mr Brown’s efforts, the pressure for change may become unstoppable.

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