British Prime Minister Gordon Brown said on Monday that he planned to step down and that the opposition Liberal Democrats had asked for talks with his ruling Labour party on forming a government.
Brown said he expected to be replaced by the time Labour holds its annual conference at the end of September.
Following are analyst reactions:
ALAN CLARKE, UK ECONOMIST AT BNP PARIBAS
"This is not good news for markets. A Lib/Lab coalition would fall short of an overall majority and this would make it harder to pass legislation.
"All in all, it would mean further delay, further uncertainty and a weaker government.
"Ultimately I think the Lib Dems are just flexing their muscles and this will not happen, but the markets are suffering as a result."
ALASTAIR NEWTON, POLITICAL ANALYST, NOMURA
"This does at least remove one of the obstacles to a Lib-Lab alliance, although I do wonder how the electorate would take being presented with another unelected Prime Minister. We have been so focused on the three leaders through the debates that it has almost been a presidential election and changing leader might be a hard sell to the country."
"This will embolden Liberal Democrats who wants to cut a deal with Labour. But it will also clarify the minds of Conservative MPs who are reluctant to make concessions to the Lib Dems."
"I think a pact between Labour, the Lib Dems and nationalists would not be something the market likes. It would be very unstable, and with many of the jobs in Scotland, Wales and Northern Ireland dependent on the public sector it would be very difficult to make serious cuts."
"Ultimately, I still think we will get a pact between the Lib Dems and Conservatives. Markets have been generous today and I think they will probably be the same tomorrow. But not much longer."
JULIA MARGO, DIRECTOR OF RESEARCH, DEMOS THINK-TANK
"I think it makes it much more possible for the Lib Dems to do a deal with Labour. It throws a massive spanner in the works for the Conservatives. It's going to be a very messy government whichever way you play it. Another (general) election in October is what I've got my money on."
ROSS WALKER, UK ECONOMIST, RBS
"The context of Brown's comments will reinforce speculation that a Lib/Lab coalition is a genuine possibility.
"The initial market reaction does not look too good. There is a fear among markets that a Lib/Lab coalition would not prioritize fixing the deficit and would slow down the process of forming a new government. This is negative for UK asset markets."
MARK WICKHAM-JONES, BRISTOL UNIVERSITY:
"The logjam is broken and the Conservatives are going to have to trump that or it's a Lib-Lab coalition."
"The Lib Dems have said they won't work with Brown, they made it clear in the campaign that Brown is a problem to them.
"It's the most dramatic development so far. It's the most logical situation as it means the Lib Dems can keep their commitment to PR (proportional representation).
"The PR thing is crucial. (Conservative leader) David Cameron will be forced to match Labour's bid on that which is a full referendum."
"I'm surprised at the ease at which (Brown) he's gone. Presumbably (Business Secretary) Peter Mandelson has told him the time to go has happened."