A FRESH round of talks aimed at forging a coalition to run the country was due to get under way today, with hopes that a new government could be in place by tonight.
Liberal Democrat MPs and peers met until after midnight to discuss their options after holding negotiations yesterday with the Conservatives and Labour.
Party leader Nick Clegg said: "We are keen to settle things as soon as we can. I am as anxious as anyone else."
Lib Dem negotiator David Laws described the meeting as "good and extensive" and said MPs and peers would gather again today.
A party spokesman said MPs and peers had "endorsed the strategy set out by Nick Clegg and agreed that current negotiations need to be concluded rapidly to provide stable government that lasts".
The possibility of a deal between the Lib Dems and Labour became a serious option after Gordon Brown yesterday announced he would stand down as Labour leader by the autumn.
Both Labour and Lib Dems last night described initial talks as "constructive".
But the Lib Dems are also considering a fresh offer from the Tories of a referendum on the Alternative Vote voting system for Westminster elections in return for a coalition deal which would put David Cameron in 10 Downing Street.
One senior Lib Dem said a decision one way or another could come within 24 hours, describing today as "crunch time".
Tory education spokesman Michael Gove later revealed that Tory MPs would be given a free vote on any legislation to ditch first past the post elections.
Mr Gove declined to comment on rumours that Mr Cameron had promised to give Cabinet jobs to right-wingers Michael Howard, Iain Duncan Smith and David Davis to buy the support of sections of his party unhappy at the prospect of coalition with Lib Dems and electoral reform.
But he said the Tories had "moved towards" the Lib Dem proposal to make the first 10,000 of earnings tax-free, while Mr Clegg's party had shown willingness to compromise on Conservative demands for swift action on the deficit.
A Cabinet meeting yesterday agreed potential contenders for the Labour leadership should not announce their candidacy until the outcome of talks on the government are concluded.
But Foreign Secretary David Miliband has already emerged as the favourite to succeed Mr Brown. Others tipped include his brother Ed Miliband, Ed Balls and Alan Johnson. Deputy leader Harriet Harman and Chancellor Alistair Darling have ruled themselves out.
LOTHIAN MPs HAVE MIXED FEELINGS OVER PARTNERSHIP
LOTHIAN'S Labour MPs today praised Gordon Brown but gave a mixed reaction to the prospects of a Labour-Liberal Democrat coalition.
Midlothian MP David Hamilton said: "I think the country will look back fondly on Gordon Brown and say he was the right man. He has taken us through extremely difficult times when other countries have hit the buffers."
Mr Hamilton said he would probably back Ed Miliband for the leadership if he stood, but said one of the key factors would be who would best be suited to lead a Labour-LibDem coalition or deal with a potential Tory-LibDem government.
Fiona O'Donnell, newly-elected MP for East Lothian, also praised the Prime Minister for his announcement. She said: "I think it's a brave and courageous thing and it did not surprise me that he was putting the Labour Party first as he has done throughout his career."
She said that there were a number of potential stumbling blocks in the Labour/Lib Dem negotiations – particularly on voting reform.
Edinburgh East MP Sheila Gilmore was open to the idea of a Labour-Lib Dem deal, and said: "There is common ground on certain issues, but it's very difficult putting together coalitions and it's not a straightforward process."