The decision to fight the contest under the old rules means that Tory MPs will draw up the shortlist of two for members in the country to vote on. But some MPs have old scores to settle and are determined to stop Ken Clarke going on the shortlist for a run-off against Mr Davis, who is favourite.
Mr Davis is thought to have around 60 MPs in the bag, while Mr Clarke and Mr Fox have around 30 each, and the youngest contender, David Cameron, about 17. Many Tory party members would be outraged if they were denied a chance to elect Mr Clarke, the former chancellor, who has consistently topped popularity polls because of his high recognition factor.
But Tory MPs predicted last night that he would be squeezed out of the shortlist by Mr Fox, the former party chairman. There will now be intense pressure on MPs by constituency members to make sure Mr Clarke is allowed into the final run-off. One Clarke supporter said: "The members will be very angry if Ken is not on their ballot forms."
Fox supporters said they were "neck and neck" with Mr Clarke. The bookmakers William Hill made David Davis the clear favourite but cut the odds on Liam Fox from 21/1 to 6/1, with Ken Clarke at 7/2, David Cameron 12/1 and Malcolm Rifkind a rank outsider at 50/1.
Mr Clarke will today launch a membership campaign under the banner "It's time to win" to remind the Tory rank and file they need to be led by someone who can take them to victory.
He said: "I will now start my campaign to give the members of the Conservative Party a leader who can take them to government and win at the next election."
The result was a blow for Mr Howard and Francis Maude, the party chairman, who wanted to give the choice of leader to MPs. That was intended to stop a right-wing leader such as Iain Duncan Smith being elected without gaining the confidence of the MPs.
Mr Duncan Smith defeated Mr Clarke for the leadership in the last contest among the party members in the country but since then, Mr Clarke has abandoned his support for early entry to the euro, and his team believe he has gained more support from activists who are tired of years in opposition.
But many Tory MPs privately say Mr Clarke is too old and stubborn, and they will not vote for him. Some of his closest friends, including Ian Taylor, are backing David Davis. David Willetts also went over to the Davis camp. Mr Clarke will today claim the support of six One Nation Tory MPs, including Sir George Young.
A possible candidate, Theresa May, who campaigned against the changes, welcomed the result. "I did feel that the mood from the grassroots was that they didn't want to give up their right to have a say in the leadership. I supported them in that," she said.
Party officials said the MPs' ballot to produce the shortlist should be completed by the third week in October and a winner could emerge in early December.
A majority of the Conservative Convention, including chairmen and MPs, voted for a change in the rules but failed to gain the required two-thirds margin among the activists.
The election timetable
3 OCTOBER: Nominations open at Tory party conference
7 OCTOBER: Michael Howard formally resigns leadership but stays on as caretaker
12 OCTOBER: The backbench 1922 Committee announces ballot of Tory MPs for shortlist
17-21 OCTOBER: Round one and round two of eliminator ballot
24-28 OCTOBER: Round three to choose shortlist of two
1 NOVEMBER: Start of hustings around the country to select the final two candidates
21-25 NOVEMBER: Postal ballot of party members
5-9 DECEMBER: Leadership result declared
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