Cameron has 'first right to form government' - Clegg

The Conservative leader will give his initial public response in a statement at 2.30 this afternoon, but it was thought far from certain that he would accept any deal with the Lib Dems which included reform of Westminster's first-past-the-post voting system.

Tories do not have the voting strength to maintain an outright majority in the new House of Commons, but may hope to govern as a minority administration with support from Northern Irish unionists, rather than offer the electoral reform that is likely to be an essential condition of any deal with the Lib Dems.

Senior Labour ministers including Lord Mandelson and Peter Hain left no doubt that the party would be ready to deliver some form of proportional voting system in return for Lib Dems joining them in an "anti-Conservative progressive majority" in the Commons.

Prime Minister Gordon Brown this morning fired the starting pistol on what is expected to be several days of haggling over a coalition government when he ordered the head of the civil service, Cabinet Secretary Sir Gus O'Donnell to provide official support for discussions between the parties.

In a statement issued by 10 Downing Street, Mr Brown left no doubt that he is not intending to step down immediately as Prime Minister as a result of Labour losing its majority in Parliament in yesterday's election.

Mr Brown said he had "a duty as Prime Minister to take all steps to ensure Britain has a strong, stable and principled government".

But Mr Cameron insisted that Labour had "lost its mandate to govern our country", as his party raced ahead in terms of seats won in the new Parliament.

The Conservatives were on target to gain more seats in this ballot than in any General Election for 80 years, said Mr Cameron after winning his Witney constituency in Oxfordshire.

With 29 seats left to declare, the Conservatives had 291 MPs, with Labour on 251 and the Lib Dems on 52. None of the parties were able to reach the 326 threshold for outright victory.

The projected results indicated that a Conservative/Lib Dem coalition could provide a solid overall majority in the Commons, but that if Labour was to enter into a deal with Mr Clegg, they would also require the support of smaller parties like the Welsh and Scottish nationalists, the SDLP and Britain's first Green MP.

The pound tumbled against the dollar and euro and the FTSE 100 index fell to a three-year low today as the markets took fright at the prospect of a hung Parliament.

In a statement on the steps of the Liberal Democrats' Westminster HQ, Mr Clegg announced: "I have said that whichever party gets the most votes and the most seats has the first right to seek to govern, either on its own or by reaching out to other parties and I stick to that view."