"I think it [Brown's departure] makes it much more possible for the Lib Dems to do a deal with Labour," said Julia Margo, director of research at the left-leaning Demos think-tank.

"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 election in October is what I've got my money on."

Final offer

The Conservative party said on Monday that it had made a final offer to the Liberal Democrats, a referendum on the alternative vote electoral system, as part of talks between the parties on forming a new government.

special report

Final results
Conservative: 306
Labour: 258
Liberal Democrat: 57
Other: 28

"We have agreed that we are going to offer the Liberal Democrats, as a final offer, a referendum on the alternative vote system," George Osborne, one of the party's negotiators said.

"It would be completely undemocratic to introduce a change to the voting system without a referendum."

The Conservatives won 306 of the 649 constituencies in the May 6 election, leaving the party short of the 326 MPs needed for an outright majority.

Labour finished with 258 MPs, down 91, the Lib Dems 57, down five, and other parties 28.

"As leader of my party I must accept that that [the election result] is a judgment on me," said Brown.

"I therefore intend to ask the Labour party to set in train the processes needed for its own leadership election."

The prime miniser did not give a precise timeframe for his departure, but said he hoped it would be done by the time of the Labour party conference, which is scheduled for late September.

Britain's sterling currency fell and government bond futures hit a session low after Brown's comments.

Markets had been hoping for a quick deal between the Conservatives and Liberal Democrats and will not relish the prospect of further delays as parallel talks take place between the Liberal Democrats and Brown's party.