Labour could team up with the Tories at Holyrood

Speaking to a leadership hustings meeting in Aberdeen, Mr Gray said Labour and the Tories shared the similar aim of reducing council tax bills for the most vulnerable.

Mr Gray said Labour wanted to exempt pensioners from water charges while the Tories wanted to give pensioners a 50 per cent council tax reduction.

He said: "We really have to ask ourselves if we cannot find a way of getting some kind of compromise which would get relatively immediate succour to at least a section of the population and by working together actually drive that through the parliament."

Mr Gray said the Labour Party should be prepared to undertake that kind of cross-party approach if it was to use the parliament of minorities to its advantage.

Derek Brownlee, for the Tories, said his party would be willing to talk to anybody, from any party, who was committed to helping reduce the impact of the council tax.

With more MSPs and MPs supporting his bid than his leadership rivals Cathy Jamieson or Andy Kerr, and with sizeable union and constituency support, Mr Gray is leading the race to replace Wendy Alexander as leader of Labour in the Scottish Parliament. His decision to seek a deal with the Conservatives – and the Tories' willingness to pursue it from their end – makes some form of agreement a real possibility.

That prospect will alarm some in the Labour Party who still regard the Conservatives as their most bitter political enemies but it shows that Mr Gray is not afraid to seek completely different solutions to achieve some form of success in the Scottish Parliament.

All the candidates for the Labour leadership believe the council tax should go in the long term, to be replaced with some form of property-based tax, but they also feel something should be done in the short term to help those suffering most acutely from high fuel and food prices.

The move to exempt pensioners from water charges was pioneered by Ms Jamieson and is being supported by the other two candidates.

Mr Gray, the former enterprise minister, also said he wanted to get supermarkets to lower the prices of "daily essentials" such as bread and milk to a uniform low level.

He said that some supermarkets charged more for basic foods in their smaller city centre stores than they did in their big, out-of-town superstores.

Mr Gray said it was often those on lowest incomes who had to use the city-centre stores and there could be "social tariffs" for foods, to make sure supermarkets provided the same prices for all.

A spokesman for the leadership contender said afterwards that Mr Gray was not looking to force the supermarkets to change their prices but he wanted to introduce a voluntary code to make sure the most disadvantaged did not lose out.

The hustings in Aberdeen was the first of a series which will see the three leadership contenders tour the country.

Mr Kerr was adamant that the party had to stop tearing itself apart. "We must stop beating ourselves up and start beating up the SNP," was his blunt message, repeating his insistence that while some in the party thought Alex Salmond was a "big figure", he saw him as a "big target".

Ms Jamieson took a different tack, stressing her left-wing credentials and insisting Scottish Labour had to change and stand up for "Labour values" if it was to regain the trust of the people.

The former justice minister also made it clear she would be backing those taking strike action on Wednesday in the public-sector pay dispute.