The departure of the seven moderates was the biggest split in UK politics in nearly four decades, illustrating the divisions that Brexit has stretched to breaking point.
The group include Chuka Umunna, who has led a campaign for a second Brexit referendum as a path to stop Britain's departure from the European Union.
Umunna called for a centrist alternative in British politics as the rebel MPs detailed how a far-left internal coup at all levels of the Labour Party had taken place under the watch of veteran socialist Jeremy Corbyn.
"The bottom line is this: politics is broken, it doesn't have to be this way, let's change it," Umunna said at a packed, hastily-arranged press conference in London's County Hall.
The seven MPs will form a breakaway independent group in parliament and expect others to join them, not only from Labour but from other parties too.
It is the most serious split in British politics since the so-called "Gang of Four" heavyweight Labour moderates quit to form the Social Democratic Party in 1981, with 28 Labour MPs eventually joining.
'Marxism masquerading as Labour'
The rebel MPs recounted their difficult journey towards leaving Labour, saying the party had changed since Corbyn became leader in 2015 and there was no longer space for their centre-left views.
Chris Leslie, one of the seven, said the party had been "hijacked" by the "hard left".
"Marxism is now masquerading as the Labour Party. It has the Labour brand but it is a machine that has taken over," he said.
Corbyn has been criticised for months for his handling of anti-Semitism within the Labour movement and his own past associations with Palestinian militants.
Another of the seven MPs, Luciana Berger, a victim of online anti-Jewish abuse for years, said: "This has been a very difficult, painful but necessary decision."
Berger said Labour had become "institutionally anti-Semitic".
"I have become embarrassed and ashamed to represent the Labour Party," she said.
"I am leaving behind a culture of bullying, bigotry and intimidation."
The MPs said they would not resign their seats and fight by-elections because it would be a distraction from Brexit.
Britain's departure from the EU -- the terms of which are still up in the air -- is set for March 29.
Besides being "sickened that the Labour Party is now a racist, anti-Semitic party", Mike Gapes said he was "furious that the Labour leadership is complicit in facilitating Brexit".
His colleague Chris Leslie said he too was leaving because of "Labour's betrayal on Europe".
Many traditional Labour voters, particularly in northern England, chose to leave the European Union in the 2016 referendum -- but a majority of Labour MPs and members supported staying in.
Corbyn has come under fire from europhiles for failing to push for a second referendum. He has instead called on Conservative Prime Minister Theresa May to negotiate a customs union with the EU to ease trade ties after Brexit.
Corbyn said he was "disappointed" by the MPs' defection.
"Now more than ever is the time to bring people together to build a better future for us all," he said, pointing to Labour's surge in support at the last general election in 2017.
The new grouping is the sixth-biggest out of eight represented in the House of Commons but is yet to crystallise into a formal political party.
The group is meeting in the next few days to divide up their portfolios and build upon their statement of values issued Monday.
Gapes told AFP it had been an agonising decision to leave Labour, saying he had reached breaking point and could no longer fight to save the party.
"I will not rejoin. Apart from my mother, this is the longest relationship I've had in my life," he said.
"All of us are committed to pressing and campaigning for a people's vote. We believe Brexit will be an economic and political disaster," he added, calling for a second referendum.
"We expect and hope that there will be other MPs who will join us."