Focus: Liberals: A battle for the heart of the party

The future leader of the Liberal Democrats will need to redefine their relationship with New Labour

When Charles Kennedy arrived at a Manchester railway station on his way to a crucial hustings, he found his way blocked by a picket of taxi drivers.

They refused to allow the Liberal Democrat leadership contender through and told him to walk a circuitous route to the next rank. A shop steward who recognised Kennedy from his television appearances decided to risk the fury of his colleagues and help the Liberal Democrat MP. He whistled for a taxi to pull up and bundled Kennedy into the back. The last thing the leadership front-runner saw as he looked back were a couple of old union hands fighting on the pavement.

This is not the first time Kennedy has managed to see off the old left to his advantage. Originally a Labour member, he left the party because he thought it was not sufficiently forward-thinking, to join the more progressive SDP in 1981. Two years later, at the age of 23, he contested his home island of Skye on an SDP ticket and became Britain's youngest MP.

But it is his relationship with New Labour that - if he wins the Liberal Democrats' leadership this week - will set the future direction for the politics of the new millennium.

The outgoing leader, Paddy Ashdown, has sought to forge close, co-operative links with Tony Blair. This has led to the foundation of a joint Cabinet committee where Europe and voting systems are discussed by both parties' frontbenchers.

Paddy loyalists say that by talking to Labour they have managed to gain what generations of Liberals have been seeking: electoral reform. A proportional voting system, which favours the Liberal Democrats, has been introduced for the European and Scottish elections, and the Prime Minister has committed the Government to a referendum on whether to change the Westminster voting system - a reform which is now expected during the next Parliament.

But many Liberal Democrat MPs fear that Ashdown's "cosying up" to New Labour has begun a trend of compromising the party's independence. They fear that Labour wants to adopt the Liberal Democrats' more popular policies and thus emasculate them as an opposition party. The differences have exploded into heated rows during weekly parliamentary party meetings in the Commons. At one such meeting Ashdown's MPs effectively banned him from extending the terms of the Joint Cabinet Committee to the discussion of health, transport and education policies.

Even Charles Kennedy, regarded as the most likely among the leadership challengers to maintain links with Labour, has indicated that education and health may be out of bounds for discussions in the Cabinet committee.

Many Liberal Democrats feel that the party must re-emphasise its radical credentials if it is to gain new ground. They want the party to move into territory abandoned by Labour, with concern for the key civil liberties, environment and the underprivileged, including the disabled and single mothers.

The votes of these activists - among the most vocal members of the Liberal Democrats' 86,000 members - are thought to have gone to Simon Hughes, the widely respected MP and former human rights lawyer who holds Southwark North and Bermondsey, the Liberal Democrats' only London inner-city seat. Hughes has won over the grassroots with his evangelical approach to party politics, enhancing his reputation as one of the House of Commons' few remaining conviction politicians.

The workaholic MP, who spends his Christmas days touring the hospitals in his constituency, ate into Kennedy's lead with his inspired performances on the hustings. Hughes, whose campaign has gained momentum in the past fortnight, has conceded that he is unlikely to win, but when the result of the contest is announced tomorrow, the low turnout of 60 per cent is expected to have favoured him.

More hard-core Liberal Democrat activists than armchair members, who recognise Charles Kennedy from his TV appearances, will have voted. The other contenders, including Jackie Ballard, Malcolm Bruce and David Rendel, are thought to have no chance of winning, but their votes could be crucial if they are transferred under the proportional representation system being used for the election.

A good turnout for Hughes will send a strong signal that the Liberal Democrats should not abandon their radical tradition. It will also give Hughes a lasting higher profile, and the right to expect an influential position in the party.

While Hughes has infected members with his enthusiasm and energy, Kennedy came across as unusually cautious and slightly diffident on the hustings. Faced with aggressive questioning about whether he favours closer links with Labour, Kennedy has appeared unusually equivocal.

His aides say that he was nervous. At one stage his campaign managers had to tell him to stop fidgeting. But this unconfident display was strange from the party's most accomplished media performer.

Tomorrow the new leader will inherit a party in better electoral shape than it has been for a generation. In the past 11 years, Paddy Ashdown has built up the Liberal Democrats into a considerable political force both on local councils and in Parliament, where they now have 46 MPs.

But if the Liberal Democrats are to hold on to many of those seats, gained from Conservatives, at the next election, they will have to think pragmatically about whether they prefer the left or the centre ground. Most Liberal Democrat MPs gained their seats from the Conservatives, many of them by squeezing the Labour vote.

Disaffected Tory voters are unlikely to be swayed by a party which wants to raise taxes and is to the left of New Labour - and a party which is so close to Labour that they are regarded as best friends.

The swell in support for Hughes may have jolted the party into reconsidering whether it has done too much to abandon its radical edge. Party apparatchiks have instructed designers to change the party logo, a yellow bird, in time for the arrival of the new leader. The new Bird of Liberty will look more like an eagle than a flying parrot. It will have straight wings and an altogether tougher and more purposeful look.

But perhaps the designers have misconstrued the new mood in the party. It may be a softer kind of politics that the Liberal Democrats are turning towards.