Ed Miliband has pledged to end the automatic "affiliation" fee paid by three million union members to Labour, in a "historic" move for the party's relationship with the unions.
The Labour leader said union members must make a "deliberate" choice to back the party and be active supporters.
The row over union influence over candidate selection in Falkirk was "the death throes of old politics", he said.
He also called for a limit on how much MPs could earn from second jobs.
Mr Miliband has promised to make politics more "open, transparent and trusted" by creating a "modern" relationship with trade unions, saying he wanted "to take action and seize the moment that Falkirk represents".
KEY PROPOSALS
- End to automatic affiliation for union members to the Labour Party
- Members would have to opt-in to pay subscriptions to Labour and could opt not to
- Spending limits and code of conduct for candidates in Labour selection contests
- Open primary to be held for selection of Labour candidate for 2016 London mayor and potentially in other contests
- Consultation needed on the amount MPs can earn from outside interests and rules to prevent conflict of interest
- Called for all-party talks on capping donation to restart
The internal party changes would be introduced as "soon as possible" and definitely before the next general election, Mr Miliband said.
The announcement came after Unite, one of the party's biggest donors, was accused of signing up its members to Labour in Falkirk - some without their knowledge - in an effort to get its preferred candidate selected.
The union's leader Len McCluskey denies people were recruited without knowing about it, and says Unite worked within the rules.
Mr McCluskey said he needed to see the details of the plan but he was "happy to engage" with discussions about an improved relationship, saying the "status quo was not an option".
"It (the speech) is very brave, it is very positive and it is one I am absolutely committed to engaging in," he told the BBC News Channel. "The vision of more working people, ordinary trade unionists, actively involved in the Labour party is something which is very central to Unite."
The BBC's political editor Nick Robinson said the Labour leader hoped the changes would put him on the front foot after coming under sustained attack from David Cameron in recent weeks as well as galvanise the party's direct links with union members.
'Death throes'In his speech in London, Mr Miliband called for a system which was "open, transparent and trusted" and "exactly the opposite of the politics we saw in Falkirk".
"What we saw in Falkirk is part of the death throes of the old politics. It is a symbol of what is wrong with politics. I want to build a better Labour Party - and build a better politics for Britain.
"There is no place in our party for bad practice wherever it comes from. I am determined to uphold the integrity of this party."
"Start Quote
End QuoteThis speech is designed to get Mr Miliband off the hook of a row that has caused him real damage"
He called for an end to affiliation fees - where members of supportive unions pay an automatic levy to Labour unless they opt out. Instead he is proposing that only those who "deliberately" choose to join the party will do so.
The fees are worth about £8m a year to Labour. Insiders estimate making them non-automatic would cost the party about £5m.
Mr Miliband said unions should have political funds "for all kinds of campaigns and activities as they choose" but individual members should not pay Labour any fees "unless they have deliberately chosen to do so".
"In the 21st century, it just does not make sense for anyone to be affiliated to a political party unless they have chose to do so.
"We need to do more, not less, to mobilise individual trade union members to be part of our party...The problem is not that these ordinary working men and women dominate the Labour Party.
"The problem is that they are not properly part of all that we do. They are not members of local parties; they are not active in our campaigns. I believe we need people to be able to make a more active, individual, choice on whether they affiliate to the Labour Party."
Former Labour Party general secretary Ray Collins will lead discussions with the trade unions on the plan, which Mr Miliband said would have "massive financial implications" for the party.
'Strict'The change could raise the current Labour membership from the current 200,000 to a "far higher number", Mr Miliband said
He also promised to look at the idea of holding open "primaries", where all adults, not just party members, can vote for the selection of a candidate in their constituency, including possibly in Falkirk.
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Lord Prescott: "It is radical and courageous"
He said such a system will definitely be used to select Labour's runner for the London mayoralty in 2016 - anyone in the capital who registers as a Labour supporter would get a vote, he said.
Mr Miliband also said there should be curbs on the amount that MPs could earn from outside interests and rules to stop conflicts of interest.
"Being an MP is not a sideline. It is a privilege and a duty and the rules should change to reflect that," he said.
'Not new'One union leader said making the political levy voluntary had been first tried by Conservative prime minister Stanley Baldwin in the 1920s and repealed by the Labour government in the late 1940s.
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Billy Hayes, Communication Workers Union: "This is going to distance ordinary people from the political process even more"
"It is not a new idea," the CWU's Billy Hayes told BBC Radio 4's Today programme. "It was introduced to weaken the trade unions' links with Labour. People have the right to opt out if they want to. I don't think it is a good idea."
But Former prime minister and Labour leader Tony Blair suggested the changes could be a "defining moment" for the party and said it would send a "very strong message" to the public that Mr Miliband would "govern for for all the country and not simply one section of it".
"It is bold and strong. It is real leadership," he told Sky News. "I think it is important not only in its own terms but... he is carrying through a process of reforms in the Labour Party that are long overdue and probably I should have done when I was leader."
The Conservatives have said Labour should refuse to take any more money from the unions until an entirely new system of funding is agreed.
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