Conservative and Liberal Democrat negotiating teams are to meet again tomorrow following over five hours of detailed discussions in London on forming a coalition government.
Conservative shadow foreign secretary William Hague emerged from the Cabinet Office in Whitehall to say that they would be briefing their respective leaders on what he described as “very positive and productive” negotiations.
As the meeting broke up, Conservative sources disclosed that Tory leader David Cameron had spoken again by telephone to Lib Dems leader Nick Clegg following their 70 minute face-to-face talks last night in Whitehall. Neither man attended today’s talks.
Mr Hague told reporters that the two negotiating teams ad had a wide-ranging policy discussion.
“We’ve had some very positive and productive discussions over many key policy areas,” he said. “The issues we have covered have included political reform, economic issues and the reduction of the deficit, banking reform, civil liberties, environmental issues.
“So 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.
“Each negotiating team is now going to report to our party leaders.”
Mr Clegg’s chief of staff Danny Alexander emerged a few minutes later, to confirm that they had agreed to have further discussions. “We’re agreed that whatever any agreement made will have deficit reduction and economic stability at its heart,” he said.
The Conservatives won the most seats in Thursday's parliamentary election but fell short of a majority and are seeking the support of the Liberal Democrats to end 13 years of Labour Party rule.
Prime Minister Gordon Brown, whose Labour came a distant second, remains in office in a caretaker role. He stands ready to try for an alliance with the Liberal Democrats if they are unable to agree with the Conservatives.
But Mr Brown's position appeared precarious, with three of his own party's MPs calling on him to step down.
The election was the first since 1974 to give no party overall control. It has come at a time when Britain's budget deficit is running at a peacetime record of more than 11 per cent of national output, unnerving financial markets. They want to see a stable government emerge quickly and start aggressively cutting the deficit.
The greatest stumbling block may well 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. Opinion polls in today’s newspapers suggested most Britons favoured a more proportional system of voting, but the Conservatives are firmly opposed to such a change.
The parties must overcome other differences on economic policy, defence, immigration and Britain's stance towards Europe, but they could find common ground on issues such as lower taxes for the poor, education and the environment. Another key hurdle to a deal is agreement on the pace of lowering the budget deficit. The Conservatives have pledged to cut it immediately but the Liberal Democrats say this could harm Britain's recovery from recession.
"The mood is good, there is a willingness to try and sort things out in the national interest," Conservative education spokesman Michael Gove told BBC television. He said it was important the two sides showed progress by tomorrow when the markets open, but that any agreement would allow them to feel comfortable and that it would last.
When asked if he would be prepared to give up his chance of a ministerial post to make room for a Lib Dem and help clinch a deal, Mr Gove replied "yes" without hesitation.
He suggested several scenarios were possible, including a minority Conservative government supported in parliament by the Lib Dems on certain key issues, a more formal coalition with ministers from both parties or something in between.
Senior Liberal Democrat Simon Hughes sounded a note of caution, warning that positions on electoral reform were very far apart and his party was suspicious of the Conservatives. "We are wanting to get on with this as quickly as we can, but nobody thinks we can get a deal by tomorrow ... If it takes a few days, so be it," he told the BBC.
"They have sounded superficially accommodating (on voting reform) but fundamentally pretty unreconstructed, and the further you go away from the leadership the more unreconstructed they are," he said. "So our party is very suspicious of the Tory party being able to deliver."
It is unlikely a deal could be reached by tomorrow, a Conservative spokesman said, noting that the party's new members of parliament, who will be briefed on the negotiations, would not meet until tomorrow evening.
If the talks between the Liberal Democrat and Conservative talks fail, a deal between Mr Clegg and Mr Brown is possible, but more complicated as their two parties combined would still not have enough MPs to command a majority in the 650-seat House of Commons.
Meanwhile, there were the first signs of dissent in Tory ranks over the prospect of co-operation with the Lib Dems, as former chairman Lord Tebbit urged Mr Cameron to put any proposed deal to a ballot of members.