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The NHS Modernisation Bill is currently at the report stage and due for a third reading on 7 September.
Liberal Democrat health spokesperson Helen Morgan said this was "a catastrophic step backwards" and described it as the "greatest backward step in patient safety in a generation".
"Andy Burnham must urgently put an end to this, and fix the Health Bill so that modernising the NHS doesn't come at the expense of accountability, transparency or patient safety," Morgan added.
In a speech on NHS reform in January, then-Health Secretary Wes Streeting said "there are many decent people working at Healthwatch who care, but the job of listening to patients can't be farmed out to an arm's length body".
"It must be core business for the NHS. That is why we're taking it back in-house and I won't back down on that either."
The Lib Dems also said the current bill removes the duty for the NHS to cooperate with the Care Quality Commission in providing key safety data and removes automatic "safe space" protections for whistleblowers.
Amendments tabled by the Liberal Democrats would cancel the changes and the party is "urging the new Burnham administration to adopt them".
The party vowed to robustly fight the government in the House of Lords, where Labour doesn't have a majority.
A DHSC spokesperson said NHS Modernisation Bill "explicitly preserves safe space provisions and staff will continue to be protected".
"The reforms we are introducing will give patients a stronger, clearer voice at the heart of health and social care."
Burnham was health secretary in 2009, when the Healthcare Commission's report was released on the Stafford Hospital scandal. Burnham then launched an independent inquiry in 2010.
In May, the Local Government Association (LGA) told the BBC disbanding Healthwatch would be a "significant step back" in accountability.
"Without an independent, locally rooted voice to challenge and represent communities, there is a risk of duplication and gaps in accountability," the LGA said.
There are currently more than 150 local Healthwatch organisations in England.
