Labour's deputy Angela Rayner has been sacked from her roles as party chair and campaign coordinator following poor results in the English local elections.
The party lost control of several councils and suffered defeat to the Tories in the Hartlepool by-election.
Leader Sir Keir Starmer is expected to reshuffle his frontbench team in the next few days.
Ms Rayner will remain deputy leader of the party as it is a position directly elected by the party members.
She is also expected to be offered another shadow cabinet role.
A Labour source said: "Keir said he was taking full responsibility for the result of the elections - and he said we need to change.
"That means change how we run our campaigns in the future. Angela will continue to play a senior role in Keir's team."
But Labour's former shadow chancellor John McDonnell said the decision to sack Ms Rayner was a "cowardly avoidance of responsibility" and accused Sir Keir of "scapegoating everyone apart from himself".
And shadow cabinet source said they were "totally shocked", adding, "everyone is gobsmacked".
Labour's shadow schools ministers Wes Streeting said he had a lot of respect for Ms Rayner adding that she had a "big responsibility" along with Sir Keir to "lead the party to victory at the next general election".
He said it was "time to take a cold hard look at ourselves to make sure we are changing Labour for the good".
'Real changes'
Meanwhile, Labour's Greater Manchester mayor Andy Burnham warned the party was still too "London-centric".
Speaking after his
re-election on Saturday, Mr Burnham said the party needed to connect with voters differently, and support more powers for English regions.
"I'm getting a bit fed up of saying this to them, but they really do now need to listen and make real changes," he added.
The results in England contrast to Wales, where Mark Drakeford led Labour to its best performance in elections to the Welsh Parliament, falling just short of an overall majority by one seat.
Labour has been in power in Wales - either in coalition or a minority - for the past 22 years.
Thursday's votes, including council and mayoral elections in England, are Labour's first major test since its crushing defeat at the 2019 general election.
Instead of recovering ground, the party suffered a series of setbacks in England, including losing overall control of councils including Sheffield and Plymouth.
The Conservatives also picked up control of several councils, including Nottinghamshire and Basildon, as well as winning Harlow from Labour.
In former heartland Tees Valley, Labour
suffered a huge defeat to incumbent Tory mayor Ben Houchen, who increased his share of the vote to 73%.
But Labour did win mayoral contests in a number of areas, including taking the West of England contest from the Tories, while retaining others including Liverpool, Liverpool City Region, Doncaster and Salford.
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Elections 2021: Labour's deputy leader Angela Rayner sacked as party chair - BBC News