The 600,000-strong GMB has officially endorsed the the former shadow work and pensions secretary in a significant boost to his campaign.
Mr Smith had not been expected to win the backing of the big unions and the GMB had stood firmly by Mr Corbyn during the attempt to oust him in the wake of the EU referendum vote.
Tens of thousands of jobs depend on retaining the Trident system
However, GMB members backed 60% to 40% in support of Mr Smith.
GMB General Secretary Tim Roache said: “The Labour Party is at a crossroads. I’m under no illusions that we’re living through dangerous political times – the like of which I haven’t seen during my three decades in our movement. It’s time for us to face up to reality.
“GMB balloted our members because this kind of decision shouldn’t be taken from up on high. We’re a democratic organisation here to serve our members’ interests. I was determined that our members would have their say. And they’ve had it.
“I’ll proudly campaign alongside Owen in the coming weeks and months to deliver on his pledges to end the public sector pay freeze, to support defence workers, to invest in health and industry, and to build an industrial strategy – these are bread and butter issues for the people I represent.
“But we can only tackle them if we’re in government. That’s the end game and I hope whatever the final result, the Labour Party will unite when all this is over. GMB members cannot afford for Labour to be talking to itself in a bubble for the next five years while the Tories run riot through our rights at work, our public services and our communities.”
So far Mr Smith has won the backing of the fourth largest union Usdaw, Community and the Musician’s Union.
Mr Corbyn has won the backing of the CWU, Aslef and UCATT.
It is likely that the decision hinges of Mr Corbyn’s policy on Trident. The Labour leader wants to scrap the nuclear deterrent, a policy the GMB, which represents tens of thousands of Trident workers, fiercely opposes.
At the party conference last year, the union refused to back Mr Corbyn’s stance on the issue, telling him hundreds of thousands of defence jobs were reliant on retaining the nuclear deterrent and to “get real”.
The union did not back any of the leadership contenders in last year’s battle because members could not reach agreement.