Shami Chakrabarti, a former director of UK-based human rights pressure group Liberty, oversaw Opposition Labour party's recent anti-semitism inquiry and was nominated by party leader Jeremy Corbyn for a peerage soon after.
The party's own deputy leader, Tom Watson, agreed the timing was "not great".
"The timing is not great for the Labour party. I wasn't aware, I wasn't consulted whether Shami was going in. I didn't know that we'd provided citations for this particular round, and I do think it's a mistake," Watson told BBC.
"Shami Chakrabarti shares Jeremy's ambition for reform of the House of Lords. Her career has been one of public service and human rights advocacy. Her legal and campaigning skills, and the trust that she has gained from many ordinary Britons, will be a considerable asset to the House of Lords.
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"Brexit will put many hard-fought rights at risk, so it is crucial that those equipped with the right skills are given the opportunity to hold this government to account," a spokesperson for Corbyn said in a statement.
Chakrabarti is the Opposition nomination as part of former British prime minister David Cameron's resignation honours list, which has already been shrouded in controversy for being packed with his former aides, donors and friends who will receive knighthoods and other honours.
In the list published yesterday, Cameron nominated a number of his political allies for peerages, including Indian-origin Conservative party donor Jitesh Gadhia, a former senior managing director at US private equity firm Blackstone.
George Osborne, the former UK Chancellor who was sacked by new Prime Minister Theresa May was handed the rarely-awarded Companion of Honour for outstanding public service.
Tim Farron, the Liberal Democrat leader, said: "David Cameron's resignation honours list is so full of cronies it would embarrass a medieval court.
"He is not the first Prime Minister to leave office having rewarded quite so many friends, but he should be the last. For the reputation of future leaders, such appointments should be handed over to an independent panel."