Nine Labour representatives in the Granite city confirmed this morning their intention to form an administration with the 11 Tory councillors, as well as three independents.
This would give the grouping a majority of one over the SNP - who were returned as the biggest party in Aberdeen at the council elections, but have so far been unable to find coalition partners of their own.
But Scottish Labour Kezia Dugdale insisted her party has already rejected a potential deal with the Tories, as no firm could be made regarding redundancies on the local authority and an end to austerity.
Speaking in Glasgow, she said: “No formal deal has been agreed at this stage. It is the case they put together a deal with the Tories and independents, which was considered by a sub-group of the Scottish executive committee last night and was rejected.
“It was rejected because we did not believe there was enough evidence in the proposals put forward that there would be no compulsory redundancies and there would be no end to austerity.
“If they choose to proceed with a deal with the Tories and independents, we will to the Labour group in Aberdeen making clear they are in breach of the party rule book and we will take the necessary disciplinary action along side that.”
After Ms Dugdale’s speech, a party spokesman said: “Labour’s approach has been clear and consistent: we absolutely cannot do any deal with another party if it would result in further austerity being imposed on local communities. The Conservatives are a pro-austerity party and the SEC panel did not accept that working families in Aberdeen would be protected from further cuts as the result of the proposed deal with the Tories.
“As a result, any Labour councillor who does not stand down from this multi-party arrangement will be in breach of Labour Party rules and may be suspended from the party.”
First Minister Nicola Sturgeon hit out at the potential coalition deal.
"So it seems @kezdugdale is not such an opponent of Tory austerity after all," the SNP leader said on social media.
The deal in Aberdeen would leave the 19-strong SNP group in opposition despite being the biggest group on the local authority. It means Labour's Barney Crockett will become the new Lord Provost in the city. Conservative Tom Mason will be the Deputy Provost.
Liberal Democrat councillor Jennifer Stewart left the group to become an independent.
The Conservatives and Labour are believed to be ready to propose a new administration which would see them sharing co-leadership.