Economy fears over hung parliament

Kenneth Clarke today issued a dramatic warning that Britain could have to be bailed out by the International Monetary Fund if the General Election results in a hung parliament.

On the eve of the second televised leaders' debate, the shadow business secretary predicted panic in the financial markets and a sterling "wobble" if the election on May 6 failed to deliver a decisive result.

His comments came as Liberal Democrat leader Nick Clegg clashed with Gordon Brown over constitutional reform, further ratcheting up the tension ahead of tomorrow's 90-minute encounter in front of a studio audience in Bristol.

Elsewhere, David Cameron - who is under pressure to put in an improved performance after Mr Clegg was widely judged to have won the first encounter - was hit by an egg while campaigning in Cornwall.

The Tory leader, who was unhurt, laughed off the incident.

With the Lib Dem surge in the polls apparently holding up, Mr Clarke used a press conference at Conservative Party headquarters in London, to ramp up the Tory warnings of the dangers of a hung parliament.

"I don't think the bond markets will wait for the discussions and horse-trading," he said.

"Sterling will wobble. We have seen even minor flickers in the opinion polls causing problems with interest rates in the recent past.

"If the British don't decide to put in a government with a working majority, and the markets think that we can't tackle our debt and deficit problems, then the IMF will have to do it for us."

Chancellor Alistair Darling dismissed his claim as "ridiculous", saying that he had taken the steps necessary to stabilise the economy.

"This is pretty desperate stuff," he said.

"Ken Clarke ought to know better. I don't know whether this is a gaffe or whether he thought through what he was going to say but this really is a ridiculous statement to make."

Liberal Democrat treasury spokesman Vince Cable accused the Conservatives of "scaremongering of the worst kind".

"They're losing the election and starting to panic," he said.

Earlier, Mr Clegg launched a scathing personal attack on Mr Brown, describing him as desperate and warning that he could not be trusted to deliver reform of the electoral system.

He hit out after the Prime Minister had insisted he was "serious" about constitutional reform and suggested Labour and the Lib Dems could co-operate to deliver a "new politics".

"There is some common ground on the constitutional issues. It is up to the Liberals to respond," he told The Independent.

But at his campaign news conference in London, Mr Clegg made clear he was not convinced by Mr Brown's apparently belated conversion to the cause of reform on the eve of an election.

"I think there is something desperate, frankly, about a Labour Party and their leader Gordon Brown who now try to present themselves as agents of reform and progress when for 13 years they have been a stubborn block to reform and progress," he said.

"Look at their warm words on political reform. If political reform was such a great idea, why on earth didn't they do it for 13 years? They promised a referendum on far-reaching electoral reform in 1997.

"We have been talking about reform in the House of Lords for 100 years. Why suddenly should we believe that a party that has refused to address the fundamental failures of accountability, of lack of transparency, of lack of legitimacy in our political system should now be the champions of precisely the thing they have sought to block?"

In an interview with the Daily Telegraph, he targeted Mr Brown even more directly, saying: "I think he is a desperate politician and I just do not believe him."

Mr Brown, on the campaign trail in Cardiff, retorted: "People can call people what they like. I'm not going to get into this business of personal attacks."

Mr Clegg's comments appeared to be an attempt to counter Tory claims that a vote for the Lib Dems risks letting Labour back in to power.

However he later sought to damp down suggestions that the vehemence of his words meant he would be unable to work with Mr Brown in the event of a hung parliament.

"We should be big enough to set aside our personal differences," he told BBC Radio 4's The World at One.