Gordon Brown could announce an early election following a strong showing in the polls.
The prime minister has summoned Cabinet to a strategy meeting at Chequers next week.
Senior Labour figures will use the parliamentary recess to discuss the possibility of an early election to deliver a clear mandate for Mr Brown.
Douglas Alexander, who was one of Mr Brown's early appointments as election coordinator, has been speaking optimistically about Labour's prospects, and Ed Miliband has been asked to draw up a draft manifesto.
The new prime minister has enjoyed a strong showing in recent opinion polls and it is possible he could call an election for spring 2008 to capitalise on his appeal.
David Cameron, who has consistently called for an electoral test for the unelected leader, said he was ready to fight an election, despite the latest opinion polls handing a clear majority to Labour.
An ICM/Sunday Telegraph poll gave Labour a seven-point lead, translating to a 100-seat majority for the new government.
Mr Alexander said Labour's lead hardens when voters are asked to compare the parties on policy and personal appeal - with Mr Brown displaying a clear advantage over Mr Cameron.
While the Tory leader is aiming for a 1997-style election victory, he is heading for a defeat on a par with Neil Kinnock's disastrous 1992 election failure, Mr Alexander said.
Ministers hope the "Brown bounce" will continue into the spring and will be looking to see whether he can maintain momentum over the quiet summer months as the party gears up for its autumn conference.
Mr Brown does not have to call an election until 2010 but a strong showing in the polls could encourage him to seek his own mandate in early 2008.
By-elections take place tomorrow in Sedgefield and Ealing-Southall and Labour officials will analyse the results before making any decision.
A key barrier to fighting an election would be lack of funds. The Labour accounts for 2006, published yesterday, showing the party is now beginning to reduce its bank debt.
Despite floundering in the polls, and with his own party experiencing internal policy disputes, Mr Cameron maintains he wants to fight an early election.
He told the Metro: "It's not up to me to call an election but I think we should have one now - I don't think there's been a mandate for Gordon Brown."
He dismissed the Tories' recent drop in the opinion polls, saying ideas count more than ratings.