Gordon Brown confirmed last night that he intends to campaign personally in the Glenrothes by-election in another sign of his emboldened mood amid the financial crisis of the past few weeks.

His announcement, in a letter urging Labour MPs and peers to rally and fight back in the campaign, breaks with the tradition that Prime Ministers do not get involved in by-elections

The move underlines Labour's growing confidence that it can hold on to the seat where the party has a majority of 10,664 but is under immense pressure from a resurgent SNP.

It is a massive change from a few weeks ago, when anyone entering a bookmakers in the Fife town and offering to put money on a Labour victory in the forthcoming by-election would have been looked on by the proprietor as more than a touch eccentric.

It wasn't simply Scottish Nationalists and commentators who were dismissing Labour's chances; Mr Brown's closest allies were discounting a Labour victory and seeking to downplay the impact of another by-election disaster on his political future.

Yet today, as the SNP launches its official campaign in the constituency, doubt has entered Nationalist minds. While the SNP remains the favourite to win, Labour's falling odds reflect that Mr Brown's Prime Ministerial comeback may have also altered this by-election landscape.

The SNP will want to keep away from constitutional matters, preferring to dwell on how the Nationalist government at Holyrood has helped voters in Glenrothes to cope with the credit crunch by reducing their outlay on council tax (frozen for a year), cutting the costs of prescriptions and abolishing tolls on the Forth Road Bridge linking Fife to Edinburgh, where many in Glenrothes work. Labour will claim that the SNP council has increased costs for home care of some elderly people in the constituency and is cutting the schools budget to help pay for the council tax freeze.

The Nationalists need a swing of more than 13 per cent to take the seat. Until recently, that seemed small beer for a party that captured Glasgow East in July with a swing of more than 22 per cent. Compared with that task, Glenrothes looked a breeze, especially at a time when a Labour Government and Prime Minister were plumbing new depths of unpopularity.

The SNP had other reasons to be cheerful because of the inroads they had already made in what, for generations, was a Labour stronghold. They were for the first time the biggest party and in control of both Holyrood and the local council, and only last year at the Scottish Parliament elections they had ousted the sitting Labour MSP with almost consummate ease.

But then along came the global economic whirlwind, sweeping even Scotland's two proud banks up in its path. Mr Brown rediscovered his political touch and what at one stage had looked like a certain political embarrassment awaiting him on November 6 now looks like a heaven-sent opportunity.

So far the parties' campaigns in Glenrothes have been stubbornly local and focused on issues such as the upgrade of roads, the cost of home care for the elderly and education spending.

The only national issues to intrude between the two main parties have been the SNP complaint over the cost of living, especially their pitch to voters that fuel bills are rising while revenues from North Sea oil go south into Treasury coffers.

Labour knows it has to tread warily if it wants to broaden the debate to embrace a “Whither Scotland” theme now that the nation's pride has been so severely dented by the fall of RBS and HBOS. Labour strategists are chomping at the bit to throw Alex Salmond's boasts last year about Scotland turning its back on the Union and joining an arc of prosperity alongside Iceland and Ireland back in his face.

But they know that by going down that path, they would leave themselves open to accusations of anti-Scottishness and of talking Scotland down from the SNP.

The SNP now will also have to cope with the reincarnation of Mr Brown as the local hero, the man who would claim to have shown a path to the world out of the financial darkness. Fifers are famously loyal to their own and if before these momentous events they were irritated by the media portrayal of their local boy made good as a political disaster, many will now rally to him and Labour.

In Glasgow East, the SNP late in the day successfully turned that campaign into a Salmond versus Brown popularity contest, one which the SNP leader comprehensively won. That route may have been at least partially closed off to the Nationalists in Glenrothes but Labour would be wrong to think that the SNP bandwagon is about to be stopped easily in its tracks.

The Nationalists have ridden a wave of populism for more than a year now and not without reason. Devolved policies such as a freeze on council tax, abolition of local bridge tolls and a £5 cap on prescription charges north of the Border have won over many previously loyal Labour voters, as Glasgow East showed.

This by-election may even turn on who Glenrothes voters want to thank most - Mr Brown for his efforts on coping with the credit crunch or the SNP for helping with their weekly budget.

Glenrothes candidates

Labour Lindsay Roy, 59, head of Kirkcaldy High

SNP Peter Grant, 48, leader of Fife Council

Liberal Democrat Harry Wills, 61, management consultant

Conservative Maurice Golden, 28, Keep Scotland Beautiful manager

Scottish Socialist Morag Balfour

UK Independence Kris Seunarine

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