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Gordon Brown to Resign as Prime Minister as Labour and Lib Dems Prepare for Talks
Mr Brown said he had asked the Labour Party to begin preparations for a leadership contest in which he will "play no part".
But Mr Brown also made it clear that he would expect to stay on as Prime Minister for a few more months in order to put in place his programme for economic recovery.
In the most dramatic twist since the election results were announced, Mr Brown admitted that Labour's defeat "is a judgment on me."
He said: "If it becomes clear that the national interest can be best served by forming a coalition between Labour and the Liberal Democrats then I believe I should discharge that duty to form that government which would in my view command a majority in Parliament in the Queen's Speech and any other confidence votes.
"But I have no desire to stay in my position longer than is needed to ensure the path to economic growth is assured and the path to economic reform we have agreed moves forward quickly.
"The reason we have a hung parliament is that no single party and no single leader was able to win the full support of the country.
"As the leader of my party I must accept that that is a judgment on me.
"I therefore intend the ask the Labour Party to set in train the processes needed for its own leadership election. I would hope it would be completed in time for the new leader to be in post by the time of the Labour Party conference.
"I will play no part in that contest, I will back no individual candidate."
Mr Brown piled pressure on the Conservative leader David Cameron by announcing that Nick Clegg "now also wishes to take forward formal discussions with the Labour Party".
Mr Clegg later defended offering to open formal talks with Labour and praised Mr Brown for his "important" announcement.
The Liberal Democrat leader said: "It must have been a very difficult thing for him to say personally. But I think he's taken it in the national interest and I think his announcement could be an important element in the smooth transition towards a stable government that people deserve - without prejudicing or predicting what the outcome of the talks will be between ourselves and the Labour party."
Mr Brown also re-iterated his commitment to electoral reform, which would also include "reform of the House of Lords".
If Mr Brown's plan came to fruition, it would mean the country being led by a second successive unelected Labour Prime Minister.
Lord Adonis, the Transport Secretary, said: "Labour and the Liberal Democrats are very close together. This will be a partnership of principle.
"We would go into these negotiations determined to succeed. Fifteen million people voted for Labour and the Liberal Democrats combined, only ten million voted for the Conservatives."
Alastair Campbell, the former Downing Street communications chief, rejected accusations that a second unelected Prime Minister would be undemocratic, saying: "It's a parliamentary democracy, not a presidential system. The Prime Minister is chosen by parliament."