Nick Clegg and David Cameron were were still struggling to find common ground last night over the deal-breaking issue of reforming Britain's voting system as they sought an agreement that could forge the next government.
A day of high drama, which saw secret meetings take place in Whitehall and desperate phone calls made between party leaders, ended without resolution. Senior Tories and Liberal Democrats will meet again today to hammer out a deal which would finally allow Mr Cameron to enter Downing Street. Mr Cameron will set out the details in a meeting with his new band of MPs in the Commons today.
The Tory leader yesterday dangled the prospect of several cabinet jobs to the Liberal Democrats, but both sides believe a looser agreement is more likely as they edge towards a deal. Gordon Brown left Downing Street for an hour-long meeting with Mr Clegg as he manoeuvred to make him an offer should talks with the Tories collapse. But it could be the last roll of the dice for the Prime Minister, who consulted his most trusted allies yesterday over his own position.
A series of "back-channel" negotiations were taking place across the weekend between the parties. One source familiar with the discussions said a broad anti-Tory coalition was a serious option – but depended on Labour having a new leader. He said: "Propping up Gordon Brown would be toxic, but once he goes things become much easier. The arithmetic is very much possible."
Politicians in all parties fear the failure to form a stable government may see the pound damaged as the markets open this morning.
However, the Liberal Democrats vowed not to be rushed into an inferior deal with the Tories because of the market volatility. One said last night: "We're not interested in some sort of sticking-plaster solution."
Emerging from five-and-a-half hours of talks at the Cabinet Office in Whitehall, both parties said discussions had been productive, with Britain's record deficit taking a prominent role. However, the parties seemed little closer to agreeing on electoral reform. Yesterday, dissent within the Liberal Democrat ranks began to build amid signs they would not be offered a serious concession on the issue from Mr Cameron.
The Tories look set to offer a free vote in the Commons on changing the voting system, a move that would almost certainly see the Liberal Democrats' desire for proportional representation voted down. Mr Clegg has been warned by senior colleagues of the pitfalls of conceding ground.
"This [electoral reform] is virtually the only issue that will be at the forefront of any discussion with the Conservatives," one Liberal Democrat frontbencher told The Independent last night. "No substantial deal can be made that doesn't progress this issue. It's not going to be handed to us on a plate but it is something that we are intent on fighting for."
A senior Conservative said last night the two sides were still far apart on electoral reform, but insisted Mr Cameron believed the distance could be narrowed. He said: "David is negotiating in good faith – he is hungry for power and so are the people around him."
Mr Clegg found himself wooed by both Tory and Labour leaders yesterday. He met with Mr Cameron in the evening having earlier spoken by phone as their teams of negotiators continued talks. He was then asked to attend a face-to-face meeting with Mr Brown at the Foreign Office. It is thought an 11th-hour agreement with Labour would include an immediate commitment on a referendum on the "alternative vote" system, with further discussions on a second public vote on proportional representation.
Some kind of deal with the Tories remains the most likely outcome. Emerging from the talks yesterday evening, William Hague, the shadow Foreign Secretary, said the negotiations had been "very positive and productive". He also listed key areas of agreement, with electoral reform notably absent. "The issues we have covered have included political reform, economic issues and the reduction of the deficit, banking reform, civil liberties, environmental issues.
"We've had good discussions about all of those areas. We intend to meet again over the next 24 hours. We are agreed that a central part of any agreement that we make will be economic stability and a reduction of the budget deficit."
Danny Alexander, Mr Clegg's chief of staff, gave an even briefer statement. "We're agreed that any agreement made will have deficit reduction and economic stability at its heart," he said. Both sides then reconvened in Portcullis House, part of the Westminster estate. Some big hitters in the party were keen to leave the door open for a last-ditch deal with Mr Brown. "Our party is very suspicious of the Tory party being able to deliver," said Simon Hughes, the Liberal Democrat climate change spokesman.
"If [a deal with the Tories] isn't possible, then of course it is both constitutionally proper but also logical that we would then talk to the other of the three major parties, which is the Labour Party," he said. "Now, they appear more accommodating on these things. They may be more willing to be helpful."
What the reformers say
"A committee would take about two years to report. But if we also add a remit to the boundary commission for a more proportional result in constituencies, then you have a very different situation. It would end the dominance in the Commons of people who have safe seats. The old system was, country seats were Tory, city seats were Labour. That would be the first decision. Then after two years, there could perhaps be a referendum on a proportional system, with the Conservatives arguing to stick with the first-past-the-post system and the Liberals coming up with whatever proportional approach they wanted. Again, the people would decide."
Caroline Lucas, Green MP for Brighton Pavilion and leader of the Green Party
"Any arrangement between the Liberal Democrats and Conservatives must include genuine and comprehensive reform of the political system. A commission, inquiry, or any other delaying tactic will not be acceptable. There should be a referendum before the end of the year which includes options for a genuinely proportional system not the self-serving system of AV which is even less proportional. The people should be asked what voting system they would prefer. That is proper democracy"
Lembit Opik, Former MP
"Electoral reform is absolutely a deal breaker for any coalition – it should be a red line for Nick Clegg. The demonstration over the weekend showed the strength of feeling. Now, we have to deliver on it. Millions of hours have been spent speaking about this. The Tories now have to ask if they are in politics for themselves or for the country. It is not possible to say they have a mandate to govern alone. Nick Clegg will have to get the approval of the party to any deal. The party just won't wear it without a serious concession on electoral reform."
Martin Tod, Former candidate, and former representative on Liberal Democrat federal executive
"I am not a fan of the current system of government. In the election we got the support that we did and our number of seats did not reflect that. If you don't see that whatever comes out is significantly different to the Conservative platform, then people in the party will be quite disgruntled. As far as the offer of a 'committee of inquiry' is concerned, we've been there before in 1997 and it represents no progress. The system would not change."
Richard Dawkins, Scientist and author
"The Liberal Democrats have the full right, under the existing constitution – which they want to change – to make alliance with either the Conservative or Labour parties. The party that they support will, by virtue of their support, command at least a temporary majority in the House of Commons.
That temporary majority will have the constitutional right to introduce the only Bill that, arguably, it has the moral right to pass: reform of the electoral system to bring the constitution into line with democracy. The Liberal Democrats should ally themselves with whichever party guarantees such reform. "Guarantees" should mean at least a firm promise of a referendum. An "all party committee" to bury the issue is not enough and should be rejected out of hand. The Liberal Democrats should make their alliance on those grounds, regardless of differences on other policies such as Europe or the economy, however important those issues undoubtedly are in these dire times. This is for one powerful reason. Once the new democratic system is in place, the Liberal Democrats can then make their case for other parts of their agenda, secure in the knowledge that, by withholding their support in a vote of confidence, they can bring down the government at any time. After that, a properly elected Parliament will have a truly democratic mandate to deal with our very serious economic and social problems, which will not have gone away."
Stephen Tall, Co-editor of the 'LibDem Voice' blog
"It is absolutely a red line for Liberal Democrat members. I don't think they are going to be bought by the same committee of enquiry that was offered by the Tories in 1974. We would not want to run the risk of giving up our independent voice in the Commons for that. Electoral reform is an absolute deal-breaker and the devil will be in the detail of what is offered. We need to see a significant concession. I think it is well understood by the leadership that we need a referendum as a bare minimum."
Pam Giddy, Director of power2010.org.uk
"Proportional representation has to be fundamental to any deal ... If Nick Clegg walks away from that the sense of disappointment will be palpable. The voters have not given an unconditional pass to Downing Street to any one party. They want them to get together – electoral reform is part of that."
Guy Aitchison, Spokesman for the Take Back Parliament pressure group
"The bottom line in the negotiations has to be change to the voting system. Polls have shown there's two-thirds support for proportional representation – there is a hunger for a new politics."