John Bruton and Dick Spring, the Fine Gael and Labour leaders, yesterday opened formal talks with the Democratic Left (DL), as their preferred partner over the Progressive Democrats.
Labour felt the PDs' free-market economic views conflicted with its defence of state-owned companies. It also feared losing support to a strong left-wing opposition if the DL were not part of the new government.
Mr Bruton argues that Fine Gael, with 47 Dail seats to Labour's 32 and the DL's 6, should have a majority of the 15 Cabinet posts. Labour wants to retain the six posts it held during its two-year coalition with Fianna Fail.
The new three-party discussions involving the DL have to strike a compromise between Fine Gael demands for reductions in income tax rates and tighter controls on public spending and the left parties' pressure for action to reduce Ireland's 17 per cent unemployment rate.