Gordon Brown has said he is stepping down as Labour Party leader.
Mr Brown, prime minister since 2007, said he wanted a successor to be in place by the time of the party’s conference in September.
Mr Brown announced his intention to quit in a statement in Downing St in which he also said his party was to start formal talks with the Lib Dems.
The Conservatives won the most seats and most votes in the election and have been in talks with the Lib Dems.
But Mr Brown’s statement will be seen as a move to smooth the way to a deal between Labour and the Liberal Democrats to form a government.
Voters’ judgement
Mr Brown said Britain had a "parliamentary and not presidential system" and said there was a "progressive majority" of voters.
He said if the national interest could be best served by a coalition between the Lib Dems and Labour – he said he would "discharge that duty to form that government".
But he added that no party had won an overall majority in the UK general election and, as Labour leader, he had to accept that as a judgement on him.
"I therefore intend to ask the Labour Party to set in train the processes needed for its own leadership election.
"I would hope that it would be completed in time for the new leader to be in post by the time of the Labour Party conference.
"I will play no part in that contest, I will back no individual candidate."
Formal process
Lib Dem leader Mr Clegg had requested formal negotiations with Labour and it was "sensible and in the national interest" to respond positively to the request, Mr Brown said.
He said the Cabinet would meet soon and a "formal policy negotiation process" would be established.
It emerged earlier that the Lib Dem negotiating team, who have held days of talks with the Conservatives, had also met senior Labour figures in private.
The BBC’s political editor Nick Robinson said one of the stumbling blocks to any Lib Dem-Labour deal had been Mr Brown himself.
John Mann, the first Labour MP to call for him to go after the election result, said Mr Brown had made a "wise and brave" decision.
The Tories secured 306 of the 649 constituencies contested on 6 May. It leaves the party short of the 326 MPs needed for an outright majority, with the Thirsk and Malton seat – where the election was postponed after the death of a candidate – still to vote.
Labour finished with 258 MPs, down 91, the Lib Dems 57, down five, and other parties 28.
If Labour and the Lib Dems joined forces, they would still not have an overall majority.
With the support of the Northern Irish SDLP, one Alliance MP, and nationalists from Scotland and Wales they would reach 328, rising to 338 if the DUP, the independent unionist and the new Green MP joined them.
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