The Equality and Human Rights Commission has launched a formal investigation into the Labour Party over allegations of anti-Semitism.
The watchdog told the party in March it had received a number of complaints and was considering its next steps.
It will now formally look into whether Labour has "unlawfully discriminated against, harassed or victimised people because they are Jewish".
Labour's shadow equalities minister says the party will "fully co-operate".
Dawn Butler said: "The Labour Party at its heart and core is an anti-racist party… so I see this as a way of ensuring, with the scrutiny of the EHRC, that the Labour Party's rules and policies are robust and fair."
She added that the investigation would help Labour "build trust with the Jewish community".
The party has been plagued by accusations of anti-Semitism since mid-2016.
The leadership has been accused of tolerating a culture of anti-Jewish prejudice by a number of its own MPs, some of whom have quit the party in protest.
Leader Jeremy Corbyn has insisted he is getting to grips with the issue and has beefed-up the party's internal disciplinary procedures.
In a statement, the EHRC said it had "carefully considered the response" it received about anti-Semitism complaints from the Labour Party and would carry out an investigation looking at:
- Whether unlawful acts have been committed by the party and/or its employees and/or its agents
- Whether the party has responded to complaints of unlawful acts in a lawful, efficient and effective manner
Mike Katz, chair of the Jewish Labour Movement, said: "For years we have been warning that the Labour Party's response to anti-Semitism within our ranks has been woeful at best, and institutionally racist at worst.
"Last year we took the unprecedented step to refer the party to the EHRC, and we welcome their decision today to launch a full statutory inquiry."
The Campaign Against Anti-Semitism, which has referred the issue to the EHRC, said British Jews had not been listened to.
Gideon Falter, the campaign's chief executive said: "In just four chilling years, Jeremy Corbyn has turned the party which pioneered anti-racism into the party that now finds itself in the company of the BNP, being investigated by the very equality and human rights regulator it once fought so hard to establish.
"Over the course of his leadership we have seen enough to convince us that Jeremy Corbyn himself is an anti-Semite and unfit for any public office and though few have acted, most Labour MPs seem to agree with us."
What is the EHRC?
The Labour Party established the independent EHRC in 2007 in order to uphold the principles of the Equality Act.
The act brings together over 116 separate pieces of legislation to protect the rights of individuals over race, sex and sexual orientation, religion or belief, age, gender reassignment and disability.
The Commission - which is funded by the Government Equalities Office - is responsible for safeguarding and enforcing the act, and holding organisations, such as businesses and government, to account.
It has the power to compel the party to hand over documents and internal communications, seek court injunctions and impose an action plan on an organisation, as well as force the person or group, via the rule of law, to implement any recommendations they make.
Any information submitted can be further questioned and they can suspend a named person if they suspect unlawful acts have been committed.
The Commission made large panel of lawyers who assess investigate or asses the initial allegations made against someone.
Change UK MP Luciana Berger, who left Labour over its handling of anti-Semitism, tweeted: "It should never have got to this - particularly for a political party which is supposed to pride itself on the values of equality and anti-racism."
Labour MP Ruth Smeeth said her party's leadership should "hang their heads in shame", adding: "In recent years, Jewish members have been undermined, humiliated and made to fell unwelcome in my party.
"Enough really is enough and today begins the journey of shining a spotlight on the problem so we can finally start to get our own house in order."
Today’s decision by the EHRC is an appalling indictment of the Labour leadership. Leadership must accept that they, and only they, are culpable for allowing this poisonous racism to infect the mainstream of the Labour Party. Corbyn must now take responsibility for this crisis— Margaret Hodge (@margarethodge) May 28, 2019
And fellow MP Wes Streeting, who chairs the All Party Parliamentary Group on anti-Semitism, called it a "day of great shame" for Labour.
He said it was "a damning indictment on the failure of our leadership to respond to repeated warnings about the nature of our problem and what needs to be done to address it", adding: "Sunlight is the best disinfectant."
Shadow equalities minister Dawn Butler admitted that in the past it had taken too long to resolve complaints but the party had made a lot of improvements to the way it dealt with complaints.
She said the investigation was a "a good thing because then we can say without doubt that we have the most strengthened and progressive procedures in place to deal with any kind of racism."
Meanwhile, the Muslim Council of Britain has written to the EHRC, formally requesting an investigation into Islamophobia in the Conservative Party, claiming that the problem "runs deep". The party has previously said that its complaints process is "robust".