UK Lib Dems see scope for Labour pact, without Brown

LONDON (Reuters) - The head of Britain's third party indicated on Tuesday that the departure of Prime Minister Gordon Brown could open the way to a coalition with ruling Labour if next week's election has no clear-cut winner.

Latest polls showed Labour and the main opposition Conservatives appearing to gain from the Liberal Democrats -- with Labour overtaking them to return to second place, in the daily YouGov poll for the Sun's Wednesday edition.

But the surveys still indicate that on May 6 no party will secure an overall parliamentary majority for the first time since 1974 -- a result Prime Minister Brown's Labour Party and the Conservatives are desperate to avoid.

Such an outcome would be a boon for the long-overshadowed Liberal Democrats, whose support could be pivotal in forming a new government. The centrist party and center-left Labour are seen as potential partners.

But weekend comments from Lib Dem leader Nick Clegg suggested he would reject Labour if they came third in the vote.

Britain's winner-takes-all voting system and quirks of demography mean Labour would almost certainly get more seats than the Lib Dems, and could outscore the center-right Conservatives, even if it won fewer votes than either.

Speaking on BBC radio on Tuesday, Clegg indicated that he would not work with Gordon Brown as prime minister, but had not ruled out an alliance with Labour, in power since 1997.

"I think many people ... would find it a bit peculiar that someone could remain in Number 10 (the prime minister's residence) even though they've come last in terms of the votes cast," he said.

BUSINESS LEADERS' DOUBTS

British business leaders have serious doubts about the Conservatives' candidate for finance minister George Osborne, and fear an inconclusive election will hit the economy, a Reuters poll showed.

Support for Brown among the chief executives and finance directors surveyed was almost non-existent, while backing for Labour finance minister Alistair Darling was little better.

Brown said it was too early to speculate on who Labour would ally with if there was no clear result. "We're going for a majority," he told a BBC radio phone-in.

Asked if it would be hard for him to work with the Lib Dems after what Clegg had said about him, Brown said: "Lots of people say lots of things, they're entitled to do that, but I don't get into this sort of personality politics."

David Cameron's Conservatives have tried to stem the Lib Dem surge by arguing that a vote for them would leave Brown, whose star has waned since he became prime minister in 2007, in power.

However, Clegg's party has repeatedly said it would work with whichever party gains the biggest mandate from the public, which is more likely to be the Conservative Party.

The Conservatives have consistently led in the polls, but their lead has shrunk in recent months, and in the last 12 days it has been threatened by a surge in support for the Lib Dems after Clegg's strong performance in televised debates.

The Conservatives are urging voters to give them a decisive victory to avoid a "hung parliament" with no absolute majority. They say this would unnerve financial markets, which want urgent action to cut the budget deficit, now over 11 percent of GDP.

The independent Institute for Fiscal Studies think tank said on Tuesday the main parties were being too ambitious about what they could achieve through spending cuts and may end up raising taxes more than they are prepared to admit.

With public spending expected to be slashed whoever wins, the parties have been reluctant to risk voters' wrath by clearly identifying the extent of cuts.

"Of course every party knows that we are going in for a period which is going to present a very tough public spending climate," Labour's Business Secretary Peter Mandelson told a news conference on child services.

(Additional reporting by Jodie Ginsberg, Adrian Croft, Estelle Shirbon, Christina Fincher; editing by Andrew Roche)