Gordon Brown has announced he will step down as Labour
leader by September - as his party opens formal talks with the Lib
Dems about forming a government.
The PM's continued presence in Downing Street was seen as harming
Labour's chances of reaching a deal.
Labour and the Tories are both trying to woo the Lib Dems with
promises on electoral reform as the battle to run the country
reaches its critical phase.
No party won a Commons overall majority at the Thursday's general
election.
The Tories, who won the most seats and votes, reacted to Mr Brown's
announcement that he was standing down as Labour leader by making a
"final offer" to the Lib Dems of a referendum on changing the
voting method to the Alternative Vote (AV) system.
Labour are offering to put the AV system into law and then hold a
referendum asking voters to approve it.
'Progressive majority'
It is now understood the Lib Dems are seeking a full coalition with
either Labour or the Conservatives.
A senior Lib Dem source indicated that he expected a resolution to
the process of shaping the new government to be reached within the
next 24 hours, saying that tomorrow was "crunch time".
A meeting of the party's MPs continued beyond midnight and ended
with no firm decisions taken, the BBC understands.
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BROWN TO STAND DOWN
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BBC political editor Nick Robinson said Mr Brown's resignation was
an audacious bid by Mr Brown to keep Labour in power - and himself
in power for a limited period - and that Tory MPs would be
furious.
In his statement, Mr Brown said Britain had a "parliamentary and
not presidential system" and said there was a "progressive
majority" of voters.
He said if the national interest could be best served by a
coalition between the Lib Dems and Labour he would "discharge that
duty to form that government".
But he added that no party had won an overall majority in the UK
general election and, as Labour leader, he had to accept that as a
judgement on him.