LONDON (AP) — Britain's election deadlock appeared closer to resolution Monday as the Conservatives led by David Cameron and a potential ally both reported progress in talks to form a new government — amid fears that prolonged uncertainty would rattle markets and anger voters.
But Prime Minister Gordon Brown's Labour Party was also making overtures to the third-place Liberal Democrats, refusing to give up on a chance for its own deal to stay in power.
The key issue: Electoral reform, which the Liberal Democrats demand but which the Conservatives fear would banish them to the political wilderness for years to come.
The Conservatives — who won the most seats in Thursday's national vote but fell short of a majority — spent the weekend wooing Nick Clegg and his Liberal Democrats in hopes of forming an alliance. Cameron and Clegg also met face-to-face Monday as teams of party negotiators tried to hammer out a power-sharing deal.
Labour, meanwhile, put out its own feelers to the Liberal Democrats — and some observers suggested that Clegg's party might be open to talks with Labour if Brown agrees to step down. Brown met with Clegg on Monday amid speculation that Cameron's expected refusal to back sweeping electoral reform could thwart a Conservative-Liberal Democrat alliance.
It's a critical juncture for Clegg. His position as kingmaker could determine his party's influence not only in the next government but in elections for decades to come, but only if the Liberal Democrats can get their main wish: an overhaul of Britain's electoral system.
Proportional representation is critical to Clegg because it would mean his party would gain a greater share of seats in House of Commons. On Thursday, his party earned 23 percent of the vote yet got only 9 percent of the body's 650 seats.
As talks with the Conservatives continued behind closed doors, Clegg on Monday urged voters to "bear with us a little longer."
"All political parties, all political leaders are working flat out, round the clock, to try and act on the decision of the British people," Clegg said. "(But it's) better to get the decision right rather than rushing into something which won't stand the test of time."
Clegg has a tough sell to persuade his party to accept an alliance with Cameron that doesn't include voting reform.
But the Conservatives strongly oppose the change, as it would likely mean fewer seats for Britain's two main parties — the Conservatives and Labour. So far, Cameron has offered the Liberal Democrats only a review of the voting system and the prospect of a House of Commons vote on changing it — a vote that Clegg is unlikely to win.
Still, the experience of decades as Britain's third-place party is likely to weigh heavily on the Liberal Democrat lawmakers as they meet with Clegg later Monday to discuss the possible alliance.
Like Clegg, Cameron also faces dissent in his ranks — caught between his circle of reformers and the Tory old guard, which blames him for failing to secure a majority in an election that months ago he was supposed to win.
William Hague, Cameron's de facto deputy, said negotiators had made "further progress" in talks Monday with the Liberal Democrats.
"The negotiating teams are working really well together," he said.
Hague said the Conservative negotiating team would report to Cameron and the party's legislators later Monday.
Former Conservative Party prime minister John Major told BBC radio that a quick deal was necessary. "Everybody is looking at the compromises that may be necessary, but I don't think this is a dance that can go on for too long," Major said.
The Liberal Democrats and Conservatives said they'd found some agreement on action to reduce Britain's record 153 billion-pound ($236 billion) deficit, and likely on reform of the education system.
However, Clegg and Cameron's groups have wide differences over foreign policy, nuclear power and plans to replace Britain's fleet of nuclear-missile armed submarines.
Britain's inconclusive election on Thursday produced a hung Parliament in which no party holds a majority of seats. The only other two-party pact in Britain since World War II came in 1977, when a weakened Labour government struck an informal deal with the then-Liberal Party lasting less than a year.
Cameron's center-right Conservatives won 306 of the 650 seats in the House of Commons, 20 short of a majority. Brown's center-left Labour won 258 and the center-left Liberal Democrats took 57 seats.
Labour Party lawmaker Alistair Darling, Britain's Treasury chief, said his party would be prepared to offer Clegg a deal on voting reform if the Liberal Democrats' talks with the Conservatives break down.
"I hope that by the end of today they will decide whether they can do a deal or not," Darling said. "We have made it clear that if they can't, then — of course — we are ready to listen to the Liberals."
Brown's Labour party could seek to form an alliance or a coalition with Clegg's party, the Scottish Nationalist Party, the Green Party's single lawmaker and other minor parties.
Despite worries that days of political horse-trading would rattle the financial markets, Britain's FTSE 100 index soared 248.72 points, or about 4.5 percent, to 5,371.74 in early trading. World stock markets surged on news of the European Union agreement on a package worth almost $1 trillion for the embattled euro.
But Howard Archer, chief U.K. and European economist at IHS Global Insight, warned political progress was necessary.
"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," Archer said.
Copyright 2010 The Associated Press.