UK election: Talks but no deal yet

The two parties that could form Britain's next government held hours of closed-door talks today - but no deal was reached.

The uncertainty has stoked fears that the political situation could cause market jitters when trading reopens tonight (NZ time).

Conservatives and Liberal Democrats have a "mountain to climb" on issues including electoral reform, a senior member of the Liberal Democrats said. The Liberal Democrats want Britain to shed a system that gave them just 9 per cent of the seats in Parliament after they won 23 per cent of the popular vote, but if Conservatives give in it could leave them at the smaller party's mercy in future elections.

The divide could offer an opening for Prime Minister Gordon Brown's Labour Party to stay in power through a coalition with the Liberal Democrats and some smaller parties.

Liberal Democrat leader Nick Clegg wasn't involved in talks with Conservatives on Sunday, but he met with Brown that afternoon and had what a party spokesman said was an "amicable discussion."

A deal must be brokered soon to calm financial market anxieties about Britain's economic stability.

"We're very conscious of the need to provide the country with a new stable and legitimate government as soon as possible," Conservative foreign affairs spokesman William Hague told reporters before disappearing into London's Cabinet Office for negotiations with senior Liberal Democrats.

After six hours of negotiations, Hague emerged to announce that the two parties agreed that they should focus on economic stability and reducing the ballooning budget deficit. More talks were planned Monday, he said.

The prospect of days of political horse-trading has fueled anxiety in financial markets already unsettled by the Greek debt crisis.

Fears that an unstable government could delay Britain's ability to tackle a record deficit dragged the FTSE 100 share index 2.6 per cent lower Friday, while the British pound was sharply down at $1.4720.

"With the markets being highly nervous and fragile in the wake of the Greek crisis and in the mood to penalise any country that is perceived to be falling short on its deficit reduction needs, it is of paramount importance that a credible commitment on how to tackle the dire UK public finances is in place sooner rather than later," said Howard Archer, chief UK and European economist at IHS Global Insight.

David Cameron's right-of-centre Conservatives won 306 of the 650 seats in the House of Commons in Thursday's national election but fell 20 votes short of a majority. For the first time since 1974, voting resulted in a "hung Parliament" - no party is able to take overall control of the country.

Cameron is now hoping to woo the centre-left Liberal Democrats, who finished third place with 57 seats. Labour finished with 258.

Conservatives and Liberal Democrats are likely to find some common ground on issues including the economy and taxes, but voting reform and foreign policy have been sticking points in the power-sharing talks.

Britain's voting system is based on races in individual districts, as it is in US congressional elections. Clegg wants a system common in continental Europe in which parties win seats in proportion to their share of the total vote - a system that is much less likely to put one party in a dominant position. The Conservatives fear such reforms would leave the Liberal Democrats holding the balance of power indefinitely.

Former Liberal Democrat leader Paddy Ashdown told the BBC that although the dialogue between the parties was congenial and respectful, "that isn't enough ... because there is a mountain to climb here."

"I don't believe that anybody can now establish a new government who is deaf to the calls from the British people for reform to our political system, and part of that is electoral reform," Ashdown said.

Brown, still hoping that his unpopular party can cling to power, offered to legislate for a referendum on a change in the voting system. That's a step further than Cameron's offer to the Liberal Democrats of a "committee of inquiry" into the issue.

Cameron and Clegg also would have to compromise on their positions toward Europe. Clegg's party is in favor of Britain eventually joining the euro currency, a policy Cameron's bloc bitterly opposes.

The Observer newspaper reported on Sunday that it obtained a secret Conservative Party document drafted by Hague that outlined a strategy for Britain to take back some powers from the European Union and emphasized, "We will never join the euro." A Conservative spokeswoman said no one in the party had knowledge of it.

Conservatives and Liberal Democrats agree on the need for spending cuts, although Cameron wants a more severe pace of austerity measures. The two also have similar policies on cutting taxes for the lowest-paid British workers. Both have pledged action on civil liberties and would likely take quick action to scrap Britain's planned national identity card program.

Both are committed to keeping British troops in Afghanistan, at least in the short term, and both have signaled they may take a more skeptical tone in relations to the White House.

Cameron previously attacked as "slavish" the links Tony Blair and Brown have shared with Washington.

Meanwhile, Brown remains in power - and will continue to reside in his Downing Street office until it becomes clear that Cameron can form a new government.

-AP