Ed Miliband may stop short of offering the Liberal Democrats a coalition if Labour is the largest party after next year's general election and fails to win an overall majority.
Close allies are urging the Labour leader to run a minority government and seek the Lib Dems' support in key votes to ensure a Commons majority. Nick Clegg and other senior Lib Dems would lose their ministerial posts under such a “confidence and supply” agreement. “I don't think we would go for a coalition; it would probably be a looser arrangement,” said one Miliband adviser.
Labour's cooling on the idea of a coalition could prevent a deal with the Lib Dems in another hung parliament. Mr Clegg would seek a second coalition if either the Conservatives or Labour fail to win an overall majority next year. “To get Lib Dem policies, we need Lib Dems in government,” one Clegg aide said.
The Deputy Prime Minister said in April: “I want to remain in government. We've only just got started and a 10-year period for us in government means we could make a major contribution.”
However, some senior Lib Dems want the party to consider a “confidence and supply” deal with Labour, as their party could then vote for or against its policies on their merit. They believe that, after the Lib Dems' disastrous performance in last month's Euro elections, the party's members would never approve a second coalition with the Tories and might be cautious about sharing power with Labour. The Lib Dem rulebook says that any arrangement with another party must be approved by the Lib Dems' MPs, federal executive and members.
Relations between Labour and the Lib Dems went into deep freeze when Mr Clegg took his party into coalition with the Tories in 2010. But the the ice has gradually melted and Mr Miliband and Mr Clegg have held talks on newspaper regulation and Europe.
This week it emerged that two close allies of both leaders met for dinner at London's Joe Allen restaurant in April. Labour's Lord (Andrew) Adonis and Lord (Stewart) Wood met Jonny Oates, Mr Clegg's chief of staff and Neil Sherlock, his former head of government relations. Insiders denied the four men discussed a possible post-election deal, insisting that the main purpose was to talk about Europe before the Euro elections.
Privately, Labour sources admit the party was ill-prepared for a hung parliament in 2010 and recognised that private pre-election talks between the Tories and Lib Dems made it easier for them to strike a deal after polling day. “We are covering all the bases this time; we might need the Lib Dems,” said one Labour frontbencher.
Some Labour MPs believe Mr Miliband will take a hard line against a full coalition before the election but could soften his stance if he fails to win a majority. They say a coalition would provide more stability than the constant threat of Commons defeats under a minority government.
The Lib Dems have lost the support of more than half of the people who voted for them in 2010, many of whom have switched to Labour. Mr Miliband needs to keep them and so he cannot be too nice to Mr Clegg - in public, at least - in case these voters viewed that as permission to return to the Lib Dem fold.
Mr Clegg will fight the election as “equidistant” from the two other main parties. In a hung parliament, Mr Clegg would talk first to the party with the most seats and votes.
On Wednesday night, Lib Dem MPs unanimously backed Mr Clegg to remain party leader, despite a grassroots move to oust him by forcing a leadership election.