A deal on coalition government could be reached today as Liberal Democrat MPs meet to discus whether to back Mr Cameron or a Labour Party under a new, as yet unknown, leader.
Any deal with Labour would need the support of other, smaller, parties, including possibly even the SNP, and leaving the party with the most votes and most seats out in the cold.
Gordon Brown’s dramatic resignation announcement yesterday also threw up the prospect of a new Labour Prime Minister who did not lead the party into the election.
Talks continue today between Labour and the LibDems while Nick Clegg’s team has an improved offer from the Tories to think about, which now includes a referendum on their holy grail of voting reform.
The three party leaders discussed the options late last night with their advisers and MPs after the most dramatically in the talks since the election produced a hung parliament last Thursday.
Both Labour and Lib Dems last night described initial talks as “constructive”. One senior LibDem source said a decision one way or another could come within 24 hours, describing today as “crunch time”.
After an election focused on the three leaders more than ever before, thanks to the television debates, there could now be a Prime Minister who was not involved in those sessions.
The government could be made up of a Labour Party who lost seats and votes, backed by a LibDem party which came third and also lost seats despite enjoying more publicity than ever.
A Tory LibDem deal was looking less likely after Mr Clegg’s MPs expressed doubts about entering into anything less than co-alition, with major policy concessions from the Tories.
Mr Clegg addressed his MPs and peers in a two-and-a-half hour meeting, which went on into the early hours, and the party demanded “clarification” from Tories on issues including electoral reform, education funding and fairer taxes before entering into any pact.
Shadow foreign secretary William Hague later revealed that while talks had previously revolved around a “supply and confidence” arrangement under which LibDems would not enter a formal coalition but would agree not to bring down a minority Tory administration, Mr Clegg’s party was now insisting on “a coalition with one side or the other”.
Mr Clegg said: “We are keen to settle things as soon as we can. I am as anxious as anyone else.”
LibDem MPs and peers are meeting again today, with the hope they will endorse a deal.
As talks resume a deal by the end of today is being touted one way or another as the LibDems have to make their mind up on the offers made to them.
Senior LibDem MP, Simon Hughes, said he believed a deal is possible today. He said: “We are keen to conclude them as soon as is practically possible, and I would imagine that should be possible -- should be possible -- during the rest of what is now Tuesday.
“There is a conversation with Labour to see if we can deal with Labour, that’s a serious conversation in its own right.
“There is a conversation with the Tories to do a deal with the Tories, a serious conversation in its own right -- and those are the only two conversations going on, and a deal would be with either of those.
“And they are both being pursued with equal vigor. There is no favoured deal.”
He dismissed the notion of a “rainbow coalition” involving nationalists and Greens, saying: “I don’t think rainbow coalition is a phrase that we’d buy.”
The chances of a formal coalition between Labour and LibDems being secured today are high following Mr Brown’s announcement and the small parties are talking up the alternative to a Tory-led government.
It would fall short of a majority and would need some level of support from Scottish, Welsh and Irish nationalists as well as even the one Green MP.
Angus Robertson, the SNP’s leader at Westminster, said he believed a so-called “rainbow coalition” could work, claiming agreement could be reached between the parties based around economic stability, proportional representation and improved governance.
He said: “I think parties of the centre-left have a responsibility to talk, to work together.
“Given that the parties in Wales, Scotland and Northern Ireland are parties of government, we have experience in coalition arrangements and we understand that stability across parties in a coalition, or an agreement, is a given.
“But it is up to the Labour Party and the LibDems to talk to other parties to work out whether that is what they really want.
“The idea that Labour MPs would overnight say ‘I’ll tell you what -- we are just going to give up and we are going to let the Tories rule for the next four years’ when there is a majority opinion across the UK that could support a progressive alliance, would be totally unacceptable in many parts of the UK, not least in Scotland.”
Brown ‘did the right thing’
Gordon Brown’s decision to quit was mostly welcomed in Scotland.
The Labour Party paid tribute to a favoured son while the SNP acknowledged the Prime Minister was right to stand down.
But Scots Tories kept out of the debate last night as negotiations in London continued.
Meanwhile, some Liberal Democrats here remained fearful about the prospect of a deal with the Tories, particularly ahead of Holyrood elections a year from now.
Scottish Labour leader Iain Gray said Mr Brown had “shown his true qualities as a statesman by putting the national interest before his own personal one.”
He went on to say that as Prime Minister Mr Brown “got the big decisions right.
“When faced with the greatest economic crisis in more than 60 years, he steered Britain through a traumatic time and put us on the road to recovery.”
SNP Westminster leader Angus Robertson MP said: “After Thursday’s result, it was inevitable that Gordon Brown would have to stand down. He has done the right thing.”
The Tories were reluctant to comment on Mr Brown’s departure.
Candidates to replace Brown
The favourite. The Foreign Secretary was widely tipped to challenge Gordon Brown, and seen by many as the real natural successor to Tony Blair. He could however, be affected by not taking the opportunity to remove Mr Brown before the election.
Aged 44 and a senior Cabinet minister, the ex-head of the Downing Street Policy Unit under Mr Blair, has experience of the sharp end of life in No.10. Odds: 4/7.
Emerged in the last year as a serious possible leader, although has denied he has designs on the top job.
As a former joint General Secretary of the Communications Workers Union, the 59-year-old would be favoured by many in the Trade Union movement, a crucial power broker. Has the experience with posts from Health Secretary to Home Secretary. Odds: 7/1.
Once Gordon Brown’s closest economic advisor at the Treasury, the 43 year-old Children’s Secretary would be seen as Brown’s chosen successor and could be the most likely challenger to Miliband. Could also expect to gather support from the big unions.
A Balls-Miliband contest could re-open the Blair Brown split in the party. Odds: 5/1.
Brother of David, the 40-year-old Climate Change Secretary was previously a key advisor to Mr Brown.
He is seen as more easy-going and fluent in public than his older sibling. He has only been in Parliament for five years and has not held as high an office as his brother, but is undoubtedly a rising star. Could command support from Brown loyalists. Odds: 10/1.
The deputy leader of the party, was a surprise deputy and would have support within the party.
The former solicitor general, Leader of the House and minister for women and equality, is unlikely to be seen as a long-term leader but would hold things together while the party chooses its future direction. Odds: 20/1.
The 63-year-old Justice Secretary, former home and foreign secretary, would definitely be viewed as a temporary stabilising candidate.
His appeal could be to offer a period of calm, while the party debated its future policy direction in opposition or government. However, his time may have passed. Odds: 25/1.