U.K. Election Deadlock Continues

Last updated at 8:46 a.m. ET

Britain's two main parties were locked in a power struggle Friday after an inconclusive election - with Labour's Gordon Brown suggesting he would try to form a coalition and Conservative leader David Cameron insisting the prime minister no longer had a mandate to govern.

Britain's stock market and the pound fell Friday as investors worried about the election's inconclusive result. In the first minute of trading, the FTSE 100 share index fell 1.3 percent before recovering somewhat by midday.

Cameron - whose Conservatives outpolled Labour but fell short of winning a majority in Parliament, according to TV projections - claimed that voters had rejected Labour in Britain's national election Thursday.

"Our country wants change. That change is going to require new leadership," Cameron said, acknowledging negotiations may be needed to determine which party, or parties, will form the next government.

"What will guide me will be our national interest," Cameron added.

Liberal Democrat leader Nick Clegg dented Brown's hopes of staying in power by calling on the Conservatives to try to form a government, without indicating whether his centrist party would be willing to join a coalition.

As morning broke over Britain, there was still great ambiguity about the outcome. The Conservatives still led with 288 seats in Parliament to 241 for Labor. The Liberal Democrats had 51 seats. The eventual winner will need 326 seats.

As sitting prime minister, Brown would traditionally be given the first chance to put together a government. His left-of-center Labour party is seen as a more natural coalition fit with the Lib Dems, the third-place party now thrust into the role of potential kingmaker.

But Clegg said the party that had gained the most seats and the most votes - the Conservatives - should have "the first right to seek to govern."

"I think it is now for the Conservative Party to prove that it is capable of seeking to govern in the national interest," he said.

Speaking earlier in Scotland, Brown vowed to "play my part in Britain having a strong, stable" government - the clearest sign yet that he would try to cling to power and seek an alliance with the third-place Liberal Democrats. He also pledged action on election reform - a key demand of his would-be partners.

Political wrangling and a period of uncertainty appear ahead for one of the world's largest economies - a prospect that could unsettle global markets already reeling from the Greek debt crisis and fears of wider debt contagion in Europe. Britain's budget deficit is set to eclipse even that of Greece next year, and whoever winds up in power faces the daunting challenge of introducing big cuts to slash the country's huge deficit.

In London, bond trading started in the middle of the night - six hours earlier than normal - as traders tried to capitalize on early forecasts. UK government bonds rallied in the hope that the Conservatives might manage to form a government.

An analysis by Britain's main television stations suggested the Conservatives will win 305 of the 650 House of Commons seats, short of the 326 seats needed for a majority. Labour was seen winning 255 seats and the Liberal Democrats 61, far less than had been expected after their support surged during the campaign.

That would mean Labour's worst performance since 1987.

Turnout for Thursday's vote appeared to be high but hundreds of people across the country were prevented from voting when polls closed at 10 p.m. The head of Britain's Electoral Commission said legal challenges to some ballot results were likely from those turned away.

Police had to go to one polling station in east London after 50 angry residents who were denied the chance to vote staged a sit-in protest. Voters in Sheffield, Newcastle and elsewhere in London also complained that they had been blocked from voting.

Poor Performance for Clegg

The biggest surprise of the night was the poor performance of the Liberal Democrats, whose telegenic leader Nick Clegg had shot to prominence due to stellar TV debate performances and had been expected to play the role of kingmaker. Instead of breaking out of its perennial third-party status, the Liberal Democrats were projected to remain about the same.

Robert Worcester, an analyst for pollster IPSOS Mori, said the Liberal Democrats' poor showing could be attributed to a low turnout by their supporters. "They said they would vote and they didn't," he said.

Clegg said he'll take his time to decide if his party will strike any pact with Britain's two major parties. He said his party has suffered a "disappointing" result, and urged all sides to take time to settle on a result that will "stand the test of time."

Meanwhile, Conservative leaders were adamant that the results meant Brown must go.

"No way this man, who has failed this electoral task, can contemplate forming a government," Conservative Party chairman Eric Pickles said of Brown.

But senior Labour figures lost no time in reaching out to the Liberal Democrats in hopes of blocking Cameron.

Foreign Secretary David Miliband said, given the election results, Labour and the Liberal Democrats were "honor bound" to talk to each other.

Business Secretary Peter Mandelson, also Labour's election chief, noted that in a "hung parliament" - one in which no party has a clear majority - the sitting prime minister is traditionally given the first chance to form a government.

Signal to Liberal Democrats

In an apparent opening pitch to the Liberal Democrats, Mandelson backed their call for an end to the existing system in which the number of districts won - not the popular vote - determines who leads the country.

"There has to be electoral reform as a result of this election," Mandelson said. The current system, he said, "is on its last legs."

Still, Cameron appears to have a considerable chance of returning rightwing icon Margaret Thatcher's party to power after 13 years in the political wilderness - even though he may have to seek deals with Irish nationalists or others.

In theory, a majority requires 326 seats. However, in practice Cameron could govern as a minority government with a dozen or so fewer because of ad hoc alliances he could form for key votes, and the fact that some parties would be unlikely to join a discredited Labour camp.

The Conservatives were ousted by Labour under Tony Blair in 1997 after 19 years in power. Three leaders and three successive election defeats later, the party selected Cameron, a fresh-faced, bicycle-riding graduate of Eton and Oxford who promised to modernize its fusty, right-wing image.

Under Brown, who took over from Blair three years ago, Britain's once high-flying economy, rooted in world-leading financial services, has run into hard times. In addition, at least 1.3 million people have been laid off and tens of thousands have lost their homes in a crushing recession.

Despite the uncertainty, California Gov. Arnold Schwarzenegger - a known supporter of Cameron - said on his Twitter feed he'd already called the Tory leader to congratulate him. "Even though results aren't in we know the Conservatives had a great day," Schwarzenegger wrote.