In the clearest sign yet that the Scottish public will be given a vote on separation, Ms Alexander moved to "call Alex Salmond's bluff" and support his referendum demand. She believes calls for independence would be defeated in a vote, removing it from the political agenda for a generation.
"I don't fear the verdict of the Scottish people – bring it on," Ms Alexander said yesterday.
Sources close to the Scottish Labour leader revealed she had been considering the major policy reversal for some time but had wanted to discuss it with colleagues at Holyrood and Westminster – including Gordon Brown, the Prime Minister – before reaching a final decision.
Ms Alexander has now made that decision and given her support to a referendum as early as next year, although she believes it is wrong to wait until 2010, as the SNP wants.
Mr Brown is cautious about backing a referendum. However, The Scotsman understands the Prime Minister has not made a decision on the issue yet.
Others in the Labour Party have been more forthright and have urged Ms Alexander to "call the SNP's bluff" by demanding a referendum as soon as possible.
Andy Kerr, the former health minister and one of Ms Alexander's closest front-bench colleagues, has backed a referendum for some time.
It is understood the move also has the support of several Scottish Labour MPs and a growing number of MSPs at Holyrood.
Ms Alexander wants to use the findings of the Scottish Constitutional Commission as a springboard for a referendum.
Sir Kenneth Calman's commission is due to produce its first report in the autumn. Ms Alexander believes its findings could then be put to the Scottish people, as part of a three-question referendum, organised by the Westminster government.
Scots voters would be asked whether they supported the status quo, the Calman recommendations – which are likely to suggest more powers for the Scottish Parliament – or outright independence.
The referendum could take place as early as next spring but is likely to be at least 18 months away, if organised by the Westminster government.
Ms Alexander is confident the Scottish people would back the Calman recommendations, not full independence.
The First Minister has already conceded that a referendum on independence would be a "once in a generation" event and, if he lost, he could not hold another one for about 20 years.
But Ms Alexander's move is a considerable gamble and a high-risk strategy for Labour.
Yesterday, the Scottish Labour leader said her message to Mr Salmond was: "This is your policy – have the courage of your convictions to bring it forward and let the parliament make up its mind."
Ms Alexander said "tactical discussions" had taken place with UK government ministers on the subject.
And she went on: "It is worrying that the SNP appears to be toying with the electorate by saying, 'We want this, it's the reason we came into politics, but we are frightened to bring the matter forward'.
"I don't fear the verdict of the Scottish people – bring it on."
Her decision to back a referendum on independence leaves the Calman commission in a difficult position, as this is the one constitutional option that Sir Kenneth has not been asked to examine.
It also leaves her Conservative and Liberal Democrat allies, who came together to create the commission, as the last two parties resisting calls for a referendum on independence.
Last night, Robert Brown, a Lib Dem MSP, said: "Wendy Alexander's suggestion is manifestly based on tactics, not principle, and is a panic response from a Labour Party in free-fall after last week's English and Welsh elections.
"Politicians should not support referendums on policies which they do not back. That is why the Liberal Democrats could not form an administration last year with the SNP."
He went on: "It is bad enough we have to put up with Alex Salmond's constant humbug about a referendum on independence without the Labour Party thinking they can use one to call the SNP's bluff. The political point-scoring from both parties is unacceptable."
Nicola Sturgeon, the deputy First Minister, said that, while she was encouraged by the Scottish Labour leader's move towards a referendum on independence, the SNP was committed to holding the plebiscite in 2010, not sooner, as demanded by Ms Alexander.
She said: "The Labour Party is cracking under pressure on the referendum question, and is being forced to consider supporting the right of the people to choose Scotland's future. Wendy's remarks simply add to Labour's disarray in Scotland."
Ms Sturgeon added: "The policy the SNP put forward is that the right to choose Scotland's future belongs to the people – which is why we published the 'National Conversation' white paper last summer, so people can consider and debate the issues, and then decide in a 2010 referendum."
'Ordinary' Brown reaches out to public in fightback bid
GORDON Brown, the Prime Minister, yesterday sought to reconnect with the British public by emphasising he came from a "pretty ordinary background" and understood their struggle to cope with soaring household bills.
He insisted he was the "right person" to lead the country, despite a Labour mauling in last week's local elections, and promised new policies on housing, health, education and the constitution. He also kept alive the possibility that a 2p per litre fuel tax rise postponed from last month until October could be scrapped altogether.
Mr Brown gave two television interviews in which he accepted the blame for the government's poor showing and said he felt the "hurt" of families struggling to meet ends meet.
But he admitted he lacked the public persona of Tony Blair, his predecessor, or David Cameron, the Tory leader, as he was "a more private person".
Mr Brown accepted blame for the loss of 311 councillors, the London mayoralty and Labour winning only the third highest share of the vote, behind the Tories and the Lib Dems.
"I feel responsible," he said. "There are no excuses on my part."
He said a Cabinet reshuffle was not his "first priority".
But Alan Duncan, the shadow business secretary, said: "If that was a fightback, Gordon Brown is now in deeper water."
Mr Brown's comments came as Frank Field, the former Labour welfare minister, said he would put down another Commons motion on the 10p tax outcry demanding clarity for the 3.8 million people the Prime Minister admitted yesterday had lost out.
John McDonnell, a Labour back-bencher, ruled out running as a "stalking horse" against Mr Brown but said the party faced a "deep-seated malaise". He added: "We cannot spin and relaunch our way back to popularity."
Winner set to take all in big gamble by Labour
ANALYSIS: HAMISH MACDONELL
WENDY Alexander's decision to back a referendum on independence represents the biggest gamble by a Scottish Labour politician in living memory.
If the SNP gets its referendum and goes on to prove there is a demand for independence, it could finish Labour as a political party in Scotland.
However, if, as Ms Alexander believes, independence is defeated in the plebiscite, it could prove the most masterly of political moves, by robbing the SNP of its raison d'tre and its biggest weapon.
The stakes could not be higher, so why has Ms Alexander taken this decision?
Once again, Alex Salmond has goaded Labour on to his territory.
He raised the prospect of the 2011 election campaign being dominated by the issue.
If the First Minister's attempts to hold a referendum on independence were voted down in the Scottish Parliament, as is expected, he promised to go to the country, arguing that the unionist parties had refused to let the Scottish people decide their own future.
Worried about this, Labour has moved, and Ms Alexander has now decided to back a referendum, if only to prevent the Nationalists using the issue in the next election campaign.
However, it is a gamble that, if it fails, will cost the Scottish Labour leader more than merely her job.