The talks, starting at 11 am (1000 GMT), will be face-to-face between the two parties but not involve the leaders, a Conservative Party spokesman said. He said it was unlikely a deal could be reached by Monday, noting that Conservative members of parliament, who will be briefed on the negotiations, will not meet until Monday evening.
Financial markets, already rattled by a debt crisis in Greece, want a new government to be formed quickly so it can set about reducing a record budget deficit swiftly and decisively. The pound, British government bonds and the London stock market all fell on Friday when it became clear the Conservatives would not have a parliamentary majority, but sterling and bonds recouped early losses on the prospect of a deal with the Lib Dems.
Lib Dem leader Nick Clegg held a series of meetings on Saturday with senior party members to seek their backing for a possible deal with the Conservatives. Clegg must overcome scepticism among a significant number of his party, who fear that Britain's third largest party may be forced to sacrifice too many cherished policies for a deal.
Several hundred protesters chanted outside the Lib Dems' headquarters, urging them to push for reform of an electoral system that favours the two largest parties. Clegg said on Saturday that four core areas of tax, education, economic recovery and fundamental political reform were at issue. "It's precisely those four changes which will guide us in the talks ahead," he said.
Conservative leader David Cameron left open the format a deal might take when he offered on Friday to work with the Lib Dems following Britain's first inconclusive election since 1974. This could be a coalition, a rarity in Britain, but is more likely to involve a pact in which the Lib Dems agree to support a Conservative-led minority government in implementing an agreed legislative programme, in return for concessions. Senior members of both parties met on Friday night.
The most important hurdle is agreement on the pace of lowering the budget deficit. The Conservatives have pledged to start cutting it immediately but the Lib Dems say this could harm Britain's recovery from a deep recession in 2008-2009. Britain's role in the European Union, immigration, defence, and electoral reform are also likely to be stumbling blocks.
If the Lib Dem/Conservative talks fail, a deal between Clegg's party and Labour is possible, but more complicated as the two parties combined would not have enough MPs to command a majority in the 650-seat House of Commons. Labour leader Gordon Brown has said the Conservatives and Liberal Democrats have the right to try to form a government first, even though he is entitled as sitting prime minister to have the first attempt under Britain's constitution.