British prime minister Gordon Brown has announced he intends to step down as Labour leader.
In a statement outside 10 Downing Street, the British prime minister also said the Liberal Democrats and Labour were to hold "formal discussions" on the possibility of forming a government.
Mr Brown said he accepted the result of the election was a judgement on himself and said the Labour leader election process would be completed by the time of the party conference in September, adding: "I will play no part in that contest, I will back no individual candidate."
He will remain as prime minister until a new Labour leader is chosen.
During his statement, Mr Brown said if it became clear that the country's best interest was served by a Labour-Lib Dem government, he would form it. However, the prime minister added he had no desire to stay in position longer than needed to ensure economic and electoral reform.
"[Lib Dem leader] Mr Clegg has just informed me that while he intends to continue his dialogue that he has begun with the Conservatives, he now wishes also to take forward formal discussions with the Labour party," he told reporters.
"I have said I will do all I can to ensure a stable, strong and principled government is formed."
"I have no desire to stay in my position longer than is needed to ensure the path to economic growth is assured and the process of political reform we have agreed moves forward quickly," Mr Brown said.
"As leader of my party I must accept that that [the election result] is a judgment on me. I therefore intend to ask the Labour Party to set in train the processes needed for its own leadership election," he said.
Britain's sterling currency fell and government bond futures hit a session low after Mr Brown's comments. Markets had been hoping for a quick deal between the Conservatives and Lib Dems and will not relish the prospect of further delays as parallel talks take place between the Lib Dems and Labour.
Mr Brown's surprise announcement came just an hour after indications that the Lib Dems were struggling to seal an alliance with the Conservatives after the inconclusive May 6th election. Lawmakers in Mr Clegg's party demanded more details on proposed policies on an overhaul of the voting system, their central demand, and on taxation.
Earlier, the Conservatives and Lib Dems said they made progress today at talks to reach a power-sharing deal after an inconclusive election that has left markets looking for a swift end to political deadlock.
David Cameron's centre-right Conservatives and the smaller centre-left Lib Dems gave no more details of their latest attempt to thrash out a deal that could lead to Britain's first collaborative government since the 1970s.
The talks will centre on the best way to rebuild the economy after the worst recession since the second World War and cut a record budget deficit, party figures said over the weekend.
"We have made further progress," said William Hague, chief negotiator for the Conservatives. "We are now going to report back to David Cameron and have meetings with our parliamentary colleagues."
Lib Dem negotiator Danny Alexander said "good progress" had been made, but refused to say whether the two sides were close to an agreement.
Spokesmen for the two parties refused to comment on a Sky News report that they have reached an "outline deal" that will be put to their members of parliament today.
Mr Brown, whose Labour Party has ruled Britain since 1997, remains prime minister while the negotiations continue and still hopes he can woo the Lib Dems and hold on to power.
The Conservatives won the most seats in the election, but fell 20 seats short of a majority in the 650-member parliament. They want the support of Nick Clegg's third-placed Lib Dems, possibly in a formal coalition or a looser power-sharing deal.
The two parties, which disagree on electoral reform, immigration and Britain's ties with the European Union, have limited time to reach an agreement.
While financial markets were focused on the EU and International Monetary Fund's rescue package to stop the Greek debt crisis from spreading, they will want Britain's uncertain political situation to be clarified in the next few days.
"The market's patience over the UK political situation will only last for a limited time," said Howard Archer, chief UK economist at IHS Global Insight.
Any breakdown of talks between the Conservatives and the Lib Dems would delay the formation of a new government and raise the possibility of a wider, and possibly more unstable, pact between the Lib Dems, Labour and a host of smaller parties.
"There would be serious doubts about its ability to take tough further fiscal action," Mr Archer said.
Analysts said markets would take solace from comments by the Conservatives and Lib Dems that reducing a deficit running at more than 11 per cent of national output would be a plank of any deal.
Mr Brown, whose Labour came a distant second in the election, remains in office in a caretaker role. He stands ready to try for an alliance with the centre-left Lib Dems if they are unable to agree with the Conservatives. The BBC said Mr Clegg's negotiating team secretly met senior Labour figures over the weekend. Labour and the Lib Dems refused to comment.
A stumbling block to a Conservative/Lib Dem deal could be electoral reform, a long-cherished ambition of the Lib Dems who would win far more seats if Britain switched from its winner-takes-all system to proportional representation.
Reuters