Spokesmen for the two parties refused to comment on a Sky News report that they have reached an "outline deal" that will be put to their members of parliament on Monday.
"We have made further progress," said William Hague, chief negotiator for the Conservatives. "We are now going to report back to David Cameron and have meetings with our parliamentary colleagues."
But Prime Minister Gordon Brown's faltering Labour Party also made overtures to the third-place Liberal Democrats, refusing to give up on a chance to stay in power.
The Conservatives won the most seats in the election, but fell 20 seats short of a majority in the 650-member parliament. They want the support of Nick Clegg's third-place Lib Dems, possibly in a formal coalition or a looser power-sharing deal.
"I don't think a period of prolonged uncertainty is a good thing," Clegg told reporters. "That's why we want to arrive at a decision as soon as possible."
The two sides disagree on electoral reform, immigration and Britain's ties with the European Union. However, Conservative foreign affairs spokesman and former Tory leader William Hague said the talks were going well.
"We are meeting now to discuss some specific ideas and proposals," he said. "We are optimistic about making further progress very soon."
Former Lib Dems leader Paddy Ashdown told the BBC that although dialogue was congenial and respectful, "that isn't enough ... because there is a mountain to climb here".
"I don't believe that anybody can now establish a new government who is deaf to the calls from the British people for reform to our political system, and part of that is electoral reform," Ashdown said.
The main "sticking-point" is likely to be over the Lib Dems demand for reform to Britain's first-past-the-post electoral system.
"That system leads to wild disjunctures between the numbers of votes cast for parties nationally and the number of MPs they end up with. The Lib Dems are its main victims; the Tories want to retain it," the Economist magazine said.
Clock ticking
Analysts said a European Union and International Monetary Fund rescue package to prevent a debt crisis from spreading had overshadowed Britain's political uncertainty and bought party leaders some time.
"Even so, the market's patience over the UK political situation will only last for a limited time," said Howard Archer, chief UK economist at IHS Global Insight.
Any breakdown of talks between the Conservatives and the Lib Dems would delay the formation of a new government and raise the possibility of a wider, and possibly more unstable, pact between the Lib Dems, Labour and a host of smaller parties.
"There would be serious doubts about its ability to take tough further fiscal action," Archer said.
Analysts said markets would take solace from comments by the Conservatives and Lib Dems that reducing a deficit running at more than 11 percent of national output would be a plank of any deal.
Brown, whose Labour came a distant second in the election, remains in office in a caretaker role. He stands ready to try for an alliance with the centre-left Lib Dems if they are unable to agree with the Conservatives.
More cooperation with China
Even if the Conservatives finally gain power, Chinese analysts suggested China-UK relations would not be affected.
"Though the Conservatives say no setbacks can be made on human rights, they need close cooperation with China on issues like nuclear non-proliferation, climate change and Iran's nuclear plan," said Yu Xiang, an analyst on European studies of China Institute of Contemporary International Relations. "So I believe the Conservatives will continue to have further dialogue and cooperation with China if they come to power."
China Daily - Reuters
(China Daily 05/11/2010 page11)