The deal, sealed after four days of negotiations, hinged on Labour's pledge to initiate a parliamentary review of university tuition fees.
The Liberal Democrats had wanted the fees simply abolished but the compromise was enough to secure their support for the election of Donald Dewar as First Minister.
Jim Wallace, the Liberal Democrat leader, is now likely to secure a cabinet post and there is expected to be one junior ministerial position for his party. The deal represents the first Liberal Democrat partnership with Labour in government since the ill-fated Lib-Lab pact of the late 1970s.
Securing a coalition agreement was vital for stable government in Scotland, where Labour came out of last week's elections nine votes short of a majority. The Liberal Democrats won 17 seats.
Last night, discontent in Liberal Democrat ranks about the deal continued to trouble the party's leadership, which attempted to demonstrate that there had been no surrender. A spokesman for the leadership said the review would be controlled by the Parliament and would report within three months. His party would be free to vote against its conclusions, the spokesman added. The 21-page pact, "Partnership for Scotland", will be published today and bluntly states: "The Liberal Democrats are not bound in advance."
Keith Raffan, a Liberal Democrat MSP, led the dissenting voices. He failed to vote for Mr Dewar as First Minister, after declaring: "I will never ever compromise on tuition fees." A colleague, John Farquhar Munro, said: "The only deal I'm looking for is the abolition of tuition fees. That's our manifesto."
Last night, Liberal Democrats MSPs were locked in discussions with their leadership so that a united front can be established around the deal.
Doubters are unlikely to be reassured by Labour's representation of the pact. A Labour spokesman emphasised that the Cabinet would agree a policy after the parliamentary review of university funding. Once agreement had been struck, all cabinet members, including Liberal Democrats, would be bound by collective responsibility.
Labour's version of the pact suggests that there could be a crisis among the Liberal Democrats within a few months if Mr Wallace, sitting in the Cabinet, split on the issue with his backbenchers. The Liberal Democrat leader famously said during the election campaign that the issue of tuition fees was "non- negotiable", making him vulnerable to attack.Reuse content