David Cameron is to set out within hours his plans to form a "stable" government, after the Tories won most votes but not an overall majority.
With results still coming in, the Tories have 294 seats in a hung parliament. He will say he plans to govern "in the national interest".
Nick Clegg, leader of the third biggest party the Lib Dems, said the Tories had the first right to seek to govern.
But Labour leader Gordon Brown is also hoping for a deal with the Lib Dems.
He is expected to make a statement in Downing Street within the next half an hour.
Under the rules of Britain’s constitution, the sitting prime minister in a hung parliament has the right to make the first attempt at forming a ruling coalition.
As counting continues the Tories have gained 93 seats, Labour have lost 87 and the Lib Dems five, despite hopes of a breakthrough for the third party.
‘National interest’
Mr Cameron is to make a statement setting out how he will seek to form a government at 1430 BST. The Conservatives said he would spell out how he would try to form an administration which is "strong and stable with broad support, that acts in the national interest".
It follows comments from Mr Clegg – whose party has done worse than in 2005 despite favourable opinion polls – that he believed the Tories had gained the "first right" to attempt to form a government in the "national interest".
Speaking outside Lib Dem headquarters in London, Nick Clegg said: "It is vital that all parties, all political leaders, act in the national interest and not out of narrow party political advantage."
He admitted it had been a "disappointing night" for the Lib Dems.
Labour sources told the BBC they believed Mr Clegg had left the door open to a deal with them – as he had also reiterated his belief that the current first-past-the-post voting system was "broken".
Labour is expected to wait to talk to Mr Clegg until sufficient results are in showing they have enough seats between them to out-vote the Conservatives.
But BBC political correspondent Carole Walker said Conservative sources were not ruling out electoral reform and could agree to Lib Dem demands for a referendum on voting reform, although they would then campaign for a "no" answer.
The Tories have won 294 seats so far but it is now not possible for them to reach the 326 seats needed to win an overall majority.
Mr Brown, whose party has 252 seats so far, has returned to Downing Street with aides and is expected to make an offer to Mr Clegg’s Lib Dems, who have so far won 52 seats, to try to form a coalition government.
He said earlier: "My duty in all of this is that there be a stable, strong and principled government and to play my part in making that possible."
Downing Street has authorised the civil service to support other parties in hung parliament negotiations – essentially giving the go-ahead for talks to begin.
The BBC projection suggests David Cameron’s Conservatives will have 305 seats. If there are 10 Unionists elected in Northern Ireland then Mr Cameron might be able to command 315 – probably still slightly too few for him to be sure of winning a Queen’s Speech.
But Labour and the Lib Dems together would have 316 seats, according to the BBC figures, which even with three SDLP MPs would still leave them at 319 – again a few votes short of a majority
In other election night news:
Northern Ireland’s first minister and DUP leaderPeter Robinson has been defeatedinEast Belfastby the Alliance party TheGreens gained their first MPat Westminster – party leader Caroline Lucas inBrighton PavillionEducation secretary Ed Balls hung on inMorley and Outwoodby just over 1,000 votes but former Home Secretary Charles Clarke narrowly lost to the Lib Dem candidate inNorwich SouthJacqui Smith, who stood down as home secretary over her expenses,lost her Redditch seat to the Conservativesbut Hazel Blears retained her seat in Salford Labour’s Margaret Hodge beat the BNP’s Nick Griffin inBarking and Dagenham,with a 5% increase in her vote Esther Rantzen came fourth inLuton South,which went to the Labour candidate Lib Dem frontbencher Lembit Opik has lost his Montgomeryshire seat after suffering a 13.2% swing to the Conservatives There were angry scenes and calls for an inquiry after people wereturned away from polling stationsas long queues formed ahead of the 2200 BST voting deadline.
Business Secretary Lord Mandelson said Mr Brown had returned to Number 10, and was going to rest and "catch his breath" adding: "We have to be patient for some time more."
"It’s not possible to make definite claims or reach final conclusions about the outcome of the election because there are results still to come in," he said.
"You could say the electorate have voted for change but what they haven’t done is voted decisively in favour of the Conservatives."
Asked if it would be "inconceivable" to have a Labour minority or coalition government which did not have Gordon Brown as prime minister, Lord Mandelson said: "Frankly there are quite a number of permutations."
But he added it was "premature" to "start getting into hypotheses".
Shadow schools secretary Michael Gove said voters would not be "entirely happy" if Mr Brown "after a defeat like this, were to try to cling on and try to form some sort of coalition of the defeated, some sort of alliance of the dispossessed".
He said: "David Cameron has secured a larger number of votes and a larger share of the votes than Tony Blair secured in 2005 when he became prime minister. The logical next step is for David Cameron to form a Conservative-led government."
The Conservatives are predicted to take 297 seats in England, with Labour on 194 and the Lib Dems on 41. The Tories have also made significant gains in Wales – where Labour also regained their former stronghold Blaenau Gwent – but the Lib Dems and Plaid Cymru failed to gain target seats.
But in Scotland the Tories failed to make a significant breakthrough, while the Labour vote held up, with the party re-taking two seats it lost in by-elections – Glasgow East and Dunfermline and West Fife. The SNP and Lib Dems fell short of their targets.
Northern Ireland’s First Minister, DUP leader Peter Robinson lost his seat in the first shock result of the night. The other main unionist leader – the UUP’s Sir Reg Empey, was also defeated in South Antrim.
With 17 of 18 Westminster seats declared – the DUP have eight, Sinn Fein have four, the SDLP have three, the Alliance Party has one and one has gone to an independent.
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