The big picture is that there is only one feasible coalition government, that of the Conservatives and Liberal Democrats. No other combination (except an unthinkable Labour-Conservative alliance) makes the math work for an actual majority. There are definite possible minority governments and combinations, which might require the passive support of either the regional nationalist parties or the Liberal Democrats themselves to survive for more than a few weeks.
This will take weeks, if not more, to emerge, and in the meantime Gordon Brown will stay in office. If the Conservatives' bid to ally with the Liberal Democrats fails, he will still get a chance--but the math suggests he would fall short (256+57+3 SDLP members from N. Ireland+1 Green party member=317 which is <325--actually the number might be 323, because of the 5 Sinn Fein deputies from Northern Ireland who won't be seated because they refuse to swear allegiance to the Queen; the equivalent calculation for the Conservatives, without the Lib Dems, is 305+8 Ulster Unionists).
The big news stories of the day are three:
1) The shift of some 5% from Labour to Conservative--this is about equivalent to the shift from the Republicans in 2004 to Democrats in 2008, with a similar, dramatic result in control (though the Conservatives must still consolidate it, they have it). Gordon Brown is likely finished as Labour leader, though that will await the conclusion of the political crisis.
2) The shortfall of the Liberal Democrats vs. the projections--they got about 1% more than five years ago, but five less seats. In the late going, it appears about one percent of their support went to Conservatives and one or two to Labour (they got some 3-5% less than the late national polls indicated). That made a huge difference, probably allowing Labour to prevent the Conservatives' winning an actual majority.
3) The question of electoral reform--this one has three parts, coming out of the elections:
a) people "queued" to vote were turned away--by law--at 10 p.m. in several precincts, and that seems improper and unfair to many;
b) the late, slow counting of votes has raised the notion that electronic voting might replace paper ballots (not that it will end ccntroversy about it, as we know);
c) the big issue of changing "FPTP" (First Past The Post, as they call it)--the system of one representative per district, largest number of votes wins.
For some, the relative defeat of the Liberal Democrats yesterday suggests that the voters don't want the change the LibDems want (to proportional representation, which would give the LibDems a huge boost, all things being equal: they got 23% of the votes and 9% of the seats). For the LibDems themselves, the results just prove the need for change.
To me, the best approach would be the "instant runoff", in which the voters rank their choices, and the losing candidates' voters second and subsequent choices are progressively reallocated until a candidate has a majority. I think this approach is consistent with British tradition and the political situation--in many districts, there is something like 30-50% for two major parties, and 10-20% for the third, so the decision would come down to the reallocation of the preferences of the third-place party's voters, which might make for more stable decisions supported by clear majorities. Proportional representation, on the other hand, seems doomed to defeat, and if the LibDems are gulled into a coalition with the Conservatives on the promise of a referendum "some time, though we won't necessarily support it", they will end up regretting it.
Interestingly, Gordon Brown supports something like the instant runoff, which is called the Australian system in Britain. If the negotiation between the Tories and LibDems founders on the electoral reform issue, there is a clear opportunity for agreement between Labour and the LD's. Just not a majority at the end of the discussion.