Instant View: Reaction to talks on UK government formation

LONDON (Reuters) - Britain's Conservatives said they held "good discussions" with the smaller Liberal Democrats on Sunday but failed to conclude a deal to govern together, and planned further talks within 24 hours.

Following are comments from analysts:

DAVID JONES, IG INDEX:

"I reckon the markets are prepared to be reasonably patient on this, maybe a few days. At least it does seem that things are fairly positive and moving along, and I don't think we'll see, at the moment anyway, too much of a negative reaction."

"But I think if it drags on for a couple of days and they are still saying it is positive and nothing is actually happening then I think it will be a different kettle of fish."#

"I don't think we are going to see a massive move either way. I think for the FTSE anyway we are already calling the FTSE down about 25 points at the moment because of what happened in the U.S. after the European markets shut. So I think we are going to see a fairly flat opening (Monday) on that news."

MARK WICKHAM-JONES, PROFESSOR OF POLITICAL SCIENCE, BRISTOL UNIVERSITY

"I feel like I'm locked in 1974 and the only outcome is a Tory minority government. The markets are going to be nervous tomorrow, there's other issues as well, I think we're in for a bad week."

"(Nick) Clegg and (David) Cameron are trying to show that they can resolve the situation but ultimately you either support electoral reform or you don't."

GEORGE BUCKLEY, DEUTSCHE BANK:

"We've seen the parties (over the years) come toward the middle ground a lot more, so in that sense we probably should see a deal at some point, whatever that deal is -- whether it is some sort of supply and confidence or whether it is something more significant."

"But there are sticking points as well. I think one of those sticking points is the question of proportional representation and the possibility of a change in the electoral process."

"The markets had already priced in even before Thursday, that there was going to be the likelihood of a hung parliament, so they shouldn't have been too surprised at a hung parliament."

"Likewise I think we know that it doesn't take a few minutes or a few hours to make a decision on getting two parties to agree. There's a lot to think about. Brokering a deal is not going to be easy."

"I think the markets will appreciate that it will take some time. They might stay hopeful. I suspect that what's influencing the equity markets in particular, more than anything else, is questions over Europe."

"The longer these talks take, the more the markets are going to be concerned about the possibility we don't see a deal which lasts in a stable government, and markets don't like unstable governments. "

"Yields will go up on gilts, equity prices will go down and sterling will fall if in the event no stable government is able to be reached."

WOLFANGO PICCOLI, EURASIA GROUP:

"The key issue for markets is still the eurozone and for that reason the focus will not be on the UK. I don't think the market was expecting any deal before the opening. The politicians are being very positive and responsible, by talking about the deficit, they are sending out all the right signals to the market."

DAVID LEA, WESTERN EUROPE ANALYST, CONTROL RISKS

"I would have thought they could have put something together quicker than this -- getting something together fast or not at all. We're not yet into "not at all" territory but we could be heading that way."

"I think the markets will give them a nudge Monday and then a much larger nudge Tuesday. It really has to be sorted by Monday night. Of course, the markets might also help bring some of the backbench MPs in line and make them accept whatever offer is on the table. For the Lib Dems, if they don't get electoral reform it is basically a failure."

JONATHAN TONGE, HEAD OF POLITICS, LIVERPOOL UNIVERSITY:

"I think the most likely option given the rather short statement this afternoon and the fact that talks are continuing, means that it is becoming increasingly unlikely that the Liberal Democrats will vote down the Queen's Speech led by a Conservative minority government."

"But I still think that there are very, very difficult barriers to a formal coalition between the Conservatives and the Lib Dems."

"It was significant I think that William Hague said political reform in his short statement, but that's a different term from electoral reform which is what the Liberal Democrats are seeking."

"Political reform means basically changing the boundaries and making them fairer and cutting the number of members of parliament. That is the Conservatives' minimalist approach."

"If William Hague had mentioned electoral reform that would have been an eye opener because clearly that would have been on the table."

"It remains what it always has been -- a deal breaker. It was a deal breaker in 1974, the last time they had a hung parliament, when the Liberal Democrats only had about 12 MPs, so quite why it should work this time as a non-deal breaker is unclear."

(Reporting by Avril Orsby, Peter Apps and Keith Weir)