UPDATE 4-Canada opposition works out deal to take power

(Adds opposition comments)

By Randall Palmer and David Ljunggren

OTTAWA, Dec 1 (Reuters) - Canada's opposition parties have reached a deal to form a coalition that would replace Prime Minister Stephen Harper's minority Conservative government less than two months after its reelection, legislators said on Monday.

The deal, which has yet to be formally signed, was struck by the opposition Liberals and the left-leaning New Democrats, who insist the government must go because it has failed to tackle the effects of the global financial crisis.

"Mr Harper has clearly lost the confidence of the House of Commons ... a majority of the House of Commons wants to form a new government, which is perfectly constitutional and legitimate," Bob Rae, a Liberal legislator, told reporters after the party's members of Parliament backed the deal at a meeting.

They also agreed that leader Stephane Dion -- who led the party to a big defeat in the Oct 14 election -- would head a coalition government if it were formed.

Given Dion's poor campaign performance, the choice is likely to be highly controversial. He has already agreed to step down next May once his replacement is chosen.

Just as challenging will be the fact that such a coalition government -- which in theory will last for 30 months -- would have to rely on the separatist Bloc Quebecois for support. The Bloc has agreed to back the coalition for 18 months.

Harper accused his rivals of trying to subvert democracy.

"I'm sure all Canadians will really ask themselves whether overturning the results of an election a few weeks later in order to form a coalition that nobody voted for ... and can govern only with the veto of the people who want to break up this country -- do they really believe that is in the interests of this country?" he told Parliament.

Environment Minister Jim Prentice called the proposed coalition "a poisonous and temporarily happy alliance."

Parliament is due to hold a confidence vote on Dec. 8 and if the government loses, the opposition parties could get their chance to govern the country.

One option for the government would be to prorogue -- or temporarily shut down -- Parliament to let tempers cool. Ministers say they haven't decided whether to use this tactic.

A Liberal legislator said the deal called for a 24-member cabinet, with 18 seats going to the Liberals and six to the New Democrats. The left-leaning New Democrats said the deal would stimulate the economy.

"There are going to be a lot of jobs, a protection of pensions and I think we can look forward to a very constructive period," negotiator Ed Broadbent told reporters.

The agreement includes aid for the suffering auto and forestry sectors, Broadbent said.

The Liberals denied a report the new government would bring in a C$30 billion ($24 billion) stimulus package.

Working with the Bloc will be a challenge. The Bloc Quebecois was clearly delighted by the deal, saying it would have a hand in crafting the government's agenda as well as the budget, although it would not be represented in cabinet, nor officially be a part of the coalition.

The chaos has knocked down the value of the Canadian dollar and there is potential for more uncertainty.

The Liberals and New Democrats have a total of 114 seats in the 308-seat Parliament. The Conservatives have 143.

The opposition is also furious that Ottawa said last week it would scrap public financing for political parties.

Such a move would cripple the opposition parties, which rely much more on public financing than the Conservatives. The government withdrew the proposal on Saturday but the opposition say they can no longer trust Harper.

The Liberals have governed Canada longer than any other party while the New Democrats have never been in power federally.

($1=$1.24 Canadian) (Reporting by David Ljunggren; Editing by Frank McGurty)