Labour leader wants to 'mend not end' relationship while giving individual working people more of a role in running the party

Ed Miliband explicitly rules out breaking Labour's historic links with the unions, saying he wants to "mend not end" the relationship while giving individual working people more of a role in running the party.

After a week in which allegations of vote-rigging by Labour's largest donor, Unite, have plunged the leader into his worst crisis since he beat his brother, David, to the top job in 2010, Miliband says the millions of working people in unions are the party's "biggest asset".

Writing in the Observer, Miliband, who will deliver a major speech on party reform this week, says: "To cut these individuals loose would be to make politics more out of touch not less, more remote from working people."

Hinting that he is looking at ways to involve them more, without having to deal with union leaders, he writes: "What both people in the Labour party and trade unions understand is that far too few of these working people are actively engaged in our party at local levels as individuals. So we should mend the relationship, not end it."

He also warns the likes of Unite's Len McCluskey that he will not tolerate special favours: "Labour can only succeed as a living, breathing party that clearly stands for the national interest, not one sectional interest."

On Friday, Miliband decided to hand evidence of alleged malpractice by Unite in the Scottish constituency of Falkirk to the police. There are allegations that union members have been signing up individuals as Labour members – and paying their subscriptions – without their consent, in an attempt to install the union's favourite candidate in the vacant parliamentary seat.

A day earlier, Tom Watson, Labour's election co-ordinator, had resigned from the shadow cabinet as the crisis engulfed the party, although he said he knew nothing about any malpractice.

Senior party sources say there is evidence of similar practices in other constituencies as unions try to advance their own agenda by pushing individuals for seats that come vacant.

The row has left Miliband open to charges from the Conservatives that the unions enjoy excessive influence at all levels in the party under his leadership, in return for their backing and funding. Unite has contributed more than £8m to Labour since he became leaderand is by far the party's biggest donor. Miliband says he will reform parliamentary selection processes to ensure they are "fair, open and transparent". Among measures expected this week is a code of conduct for anyone seeking selection and a cap on spending during selection contests.

There have been allegations that unions have spent large sums trying to ensure their candidates are selected to stand during elections.

Senior party figures in the party are urging Miliband to go further by endorsing changes in the way money from the unions go to the Labour party. At present, members of unions that are affiliated to Labour will pay a part of their subscription to the party as a political levy unless they exercise an "opt out" and request not to do so.

Some senior figures believe this system allows Labour's opponents to maintain that the money is a union donation rather than the sum of millions of small donations from individual members. They believe Labour should insist that from now on the party would require union members to "opt in" to paying the political levy, demonstrating their will to finance the party.

"This way they would be individual donors to the Labour party," said one senior source. "The money would be coming from individuals not from the unions. It would then be the Tory party that was the party of big money donors while Labour would be the party of millions of working people."

He writes that events in Falkirk, "have betrayed the values of our party. The practices we have seen should be unacceptable in any political party. But they are certainly unacceptable in the Labour party."