GORDON Brown announced he would be standing down as leader of the Labour Party last night as the battle for the hand of the Liberal Democrats took a dramatic twist.

The Prime Minister upped the stakes as it was revealed his party would hold formal talks with the Lib Dems as they agonise over whether to form a power-sharing government with Mr Brown’s party or the Conservatives.

In a statement outside No. 10, Mr Brown offered to stay on as Prime Minister but asked the Labour Party to put in motion a formal mechanism to replace him as leader, insisting he was confident an administration could be formed with the Lib Dems.

But the Conservatives made a last-ditch attempt to forge their own deal, offering Nick Clegg’s party a referendum on the Alternative Vote (AV) electoral system for Westminster elections following a meeting of Conservative MPs.

The AV system, which involves voters numbering candidates in order of preference in single-member constituencies, was backed by Labour in its election manifesto but falls well short of the proportional systems preferred by the Lib Dems.

Mr Brown said Lib Dem leader Nick Clegg had formally asked yesterday to open negotiations with Labour on a possible deal on the formation of a new government.

The request came after Mr Clegg addressed his own MPs on the progress of talks with Conservatives since the hung parliament result of Thursday’s General Election.

Foreign Secretary David Miliband has emerged as an early front-runner to succeed Mr Brown as Labour leader, but voices of dissent have been heard about Mr Brown staying on and the prospect of another Labour Prime Minister not directly elected by voters after the party’s defeat at the polls last week.