LONDON, May 11 - Britain's Liberal Democrats said talks to form a new government had entered a decisive phase on Tuesday, after Labour PM Gordon Brown's dramatic announcement he would step aside to ease a centre-left coalition.
Brown’s statement late on Monday disrupted efforts by the centre-right Conservatives to broker a power-sharing deal with the Liberal Democrats after the country’s first election producing no clear winner since 1974.
It is unclear which way the Liberal Democrats will turn. With markets and voters keen for an end to political uncertainty, Liberal Democrat leader Nick Clegg said the talks had entered a "critical and final phase".
"I am as impatient as anybody else to get on with this, to resolve matters one way or another," he told reporters.
Conservative leader David Cameron said it was "decision time" for the Liberal Democrats, who came third in Thursday’s election behind the Conservatives and left-leaning Labour.
After the first set of formal talks between Labour and the Liberal Democrats ended at lunchtime, Labour energy minister Ed Miliband said they had been "good discussions".
Cameron and Clegg also met on Tuesday and negotiating teams from the two parties resumed discussions in the early afternoon.
Britain is emerging from its worst recession since World War Two with a record budget deficit that analysts believe will only be cut effectively by a strong government.
By 1236 GMT, the FTSE 100 index of leading shares was down 2.1 percent, sterling was jittery and UK government debt heavily underperformed its German equivalent as the uncertainty weighed on the market.
"The market wants a conclusion to this and whilst we are without a conclusion the market will remain nervous," said one London-based gilts trader.
The head of the French financial markets watchdog said London should not rely on EU help in any financial crisis.
"The English are very certainly going to be targeted given the political difficulties they have. Help yourself and heaven will help you," Jean-Pierre Jouyet, who was European affairs minister from 2007-2008, told Europe 1 radio.
BIDDING WAR
The Conservatives emerged as the largest party in parliament but fell 20 seats short of an outright majority.
They quickly began talks with the centre-left Liberal Democrats, or Lib Dems, on a government alliance. However, the smaller party wanted concessions on areas including reform of the voting system to make it more proportional.
Sensing a hesitancy on the part of the Lib Dems, Brown said on Monday he would step down by the time Labour holds its annual party meeting in September.
Clegg had said during the campaign that he was reluctant to work with Brown and the prime minister’s departure could smooth the path to a deal.
The Conservatives responded to Brown’s statement by offering the Lib Dems a place in a coalition and a referendum on limited electoral reform that falls short of their demand.
"That’s our last offer in that area," Conservative finance spokesman George Osborne told the BBC. "But I’m very willing to discuss with the Liberal Democrats how we create that strong, secure government and deal with this massive economic problem."
Clegg, 43, finds himself in a difficult situation. His party has more in common with Labour in terms of policy, but the two parties combined would be unable to command a majority and would need to enlist the support of smaller parties in a potentially more unstable "rainbow coalition".
An alliance with the Conservatives would offer a more stable formation, with a strong majority but a more difficult political compromise. Activists on one Lib Dem website were leaning towards a deal with the Conservatives, rather than Labour.
"How can anyone with any gumption call for stable government and then propose allying with a party which is going to spend the next four months in a bitter leadership contest?" said one blogger on Liberal Democrat Voice.
Former Labour interior minister David Blunkett said voters already angry about a scandal over politicians’ expenses claim would be uneasy about the power-sharing talks taking place in secret and warned that it will lead to a "lack of legitimacy".
Former Conservative defence minister Malcolm Rifkind accused Clegg of "horsetrading" to try to grab power, rather than acting in the national interest.
"This comes straight out of the Robert Mugabe school of politics. You lose the election, but then you cobble together some sort of formula to keep you in power," he told BBC radio.
