A new party challenging Labour policies for working people is being launched by political and trade union activists.
Mr Nellist says there is an "urgent need" for a new party
The Campaign for a New Workers Party says it is a reaction to what it calls "spin and control freakery".
With the aim of "standing up for the millions, not the millionaires" members will claim Labour policies are not doing enough for working people.
Former Labour MP Dave Nellist said the "cash for honours" row showed the party had become "rotten and undemocratic".
The activists will dress up in Victorian clothes outside a conference due to be addressed by Education Secretary Ruth Kelly on Friday, to demonstrate their belief that New Labour policies were backward leading.
The party will stage a one-day conference in London on Sunday, which it expects will attract hundreds of people.
Mr Nellist, who is now a Socialist Party councillor, said the latest allegations about Labour's "cash for honours" scandal, including the revelation by Labour Party treasurer Jack Dromey that he was "kept in the dark" about recent large loans to the party, illustrated Labour's changing face.
"If one of the most senior elected officers of the party, and an official of one of biggest trade unions as well, does not know who is bankrolling the party then it shows that some trade union leaders' idea that they can reclaim the Labour Party is a myth," he said.
"Some of us have been making the point for years that Labour has been taken over by an undemocratic grouping, obsessed with spin and control freakery, who have closed down all the democratic channels by which ordinary members and trade unionists used to have some influence in the Labour Party," he said.
A spokesman for the campaign said the aim was to bring together workers, trade unionists, socialists and activists to establish a new political party in England and Wales.