Writing in The Independent, Mr Kennedy, regarded as the front-runner for the party leadership, is taking a calculated risk by going farther than some of the other candidates who oppose closer ties. He refuses to rule out fresh areas for agreement with Labour.
"We can see in issues such as fair votes for local and Westminster elections and the campaign for British entry into European monetary union, there are further areas where we will want to work together.
"Beyond these great constitutional questions and our current dialogue on foreign policy, it looks unlikely that there will be other areas for co-operation in this Parliament, but we should not rule out the possibility - with tough negotiations for our case, and with the party working as one with the leader."
Mr Kennedy has so far kept quiet over his position on the controversial issue of closer links with Labour, which is likely to dominate the rest of the Liberal Democrat leadership campaign into early August.
His backers are keen to ensure that he strikes a middle course between those who want a coalition with a seat in a Blair government and opponents of coalition, such as Jackie Ballard and David Rendel.
Don Foster will outflank Mr Kennedy for pro-partnership votes by underlining his support for closer links with the Government. Launching his campaign for the leadership today, Mr Foster will urge the party to back him, even it means taking a risk.
Setting himself up as the natural successor to Paddy Ashdown, who stood down at the weekend after 11 years asleader, Mr Foster will say: "It's a risk if we do it wrong. If we let ourselves be absorbed by Labour. As Paddy has shown, working with the Government is a world apart from cosying up to Labour."
Paul Tyler, party chief whip, responded to criticism that the field of candidates, now six, was too large by pulling out. He warned that the race was becoming "a political beauty contest" and "oversubscribed". His move will increase the pressure on other candidates to drop out of the race.
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