The increasingly bitter "battle of the Milibands" reaches new heights today as younger brother Ed dramatically ditches New Labour and calls for an end to the party's drift towards "brutish" and "unjust" US-style capitalism.

As the two brothers enter the final lap of the Labour leadership race, David Miliband, by contrast, declares New Labour to be "living and breathing in every community" as he announces himself "ready to lead" its renewal.

All five candidates will step up campaigning this week as ballot papers are sent out to some 200,000 Labour supporters. The winner will be announced on 25 September, the day before Labour's annual conference in Manchester.

Writing in today's Observer, Ed Miliband raises the stakes as he positions himself firmly to the left of his elder brother, who is more closely associated with the Tony Blair era. Drawing a deliberate distinction with the joint architect of New Labour, Peter Mandelson, who once said he was "supremely relaxed about people getting filthy rich", the former energy and climate change secretary also promises an assault on pay inequality that will consign such views to history.

"It is plain wrong to think that we can build a stronger society when we are relaxed about bankers paid 200 times that of their cleaners," Ed Miliband argues. In his article the younger Miliband says that, while New Labour achieved "great things", in the end its limitations were exposed.

He argues that, under Labour, society became "more unequal as a country and many middle and low income families were left feeling squeezed, part of a society where we work the longest hours in western Europe". In terms that will endear him to many on the left, if not to the power brokers in Washington, he calls for a new kind of capitalism that rejects the US model that many in New Labour wanted to imitate.

"We need a different approach. Britain's big question of the next decade is whether we head towards an increasingly US-style capitalism – more unequal, more brutish, more unjust – or can we build a different model?"

David Miliband, who concedes that New Labour was far from perfect, insists, however, that it should be proud of its record and is determined that it should remain a party of broad appeal among both its traditional supporters and the middle classes.

The shadow foreign secretary, who has the support of most members of the shadow cabinet, will send out letters and leaflets to Labour supporters this week asking for their vote.

In a race that has created real tensions between the brothers and their camps, he will call for unity and claim to have the necessary experience to defeat David Cameron, a quality he believes his brother lacks.

"There has to be a new era of politics. We need to be fighting the Tories – not each other," he will say. Focusing on the need to reorganise the party and learn from US President Barack Obama's methods, he will promise "a new type of leadership that gives party members, our greatest asset, the recognition and support they deserve".

In private, backers of David Miliband accuse his brother of making a brazen pitch for the second preference votes of leftwinger Diane Abbott and the other candidates, Andy Burnham and Ed Balls, in a desperate attempt to catch up with his brother, who remains the narrow favourite. Second preference votes will be crucial if the vote is close.

Some close to David Miliband fear, however, that the publication on Wednesday of Tony Blair's memoirs could harm his campaign as the former prime minister rakes over the party's past and returns briefly to the limelight. Blair will also appear in a special BBC programme with interviewer Andrew Marr to promote the book.

Burnham condemned the way the favourites were conducting the debate. "There is a real danger for Labour that the frontrunners are beginning to make this race look like a battle between old and new Labour. That suits the media, but not the Labour party. Party members want us to move beyond all that stale old debate.

"We can't have more of the same. I have always spoken for the Labour mainstream, and that is the voice we need to hear now. I am neither Old Labour norNew Labour, but true Labour. That is the clear message I will be taking into the final stages of this race."