For a couple of hundred new MPs, their first day in Parliament could well turn out to be the most dramatic they ever experience. As they wandered about, collecting their passes and their laptops, finding their lockers and wondering when they will be allocated offices, a bewildering political drama unfolded around them.

The meeting that could change the shape of British politics began around lunchtime yesterday, in a room well known to old parliamentary hands: the Grand Committee Room. Newly elected Liberal Democrat MPs had to ask for directions.

Around a horeshoe-shaped table, between the committee room's panelled walls, Nick Clegg set out to a sceptical group of Liberal Democrat MPs his reasons for thinking that David Cameron was a man with whom he could do business.

Until then, it seemed Mr Cameron was on the threshold of 10 Downing Street, where he would be the youngest prime minister for nearly two hundred years, and the first Conservative leader since 1945 to rely on support from outside his party.

After nearly three hours of fraught discussion, British politics had veered off in a different direction altogether.

Mr Clegg's problem was that, much as he may have liked to strike up a deal with David Cameron, he was not in a position to defy his own parliamentary party. And they were not in a mood for compromise. As one member of his team said ruefully yesterday: "We know that whatever we do we'll be shafted by our own party."

For David Cameron, the day had seemed to start so well. He left his west London home at 8am in an apparently sunny mood. "I am always positive," he told waiting journalists.

Two hours later, two teams of negotiators resumed talks in the Cabinet Office in Whitehall. For the Liberal Democrat team, made up of Chris Huhne, David Laws, Danny Alexander and Andrew Stunell, it was a unique experience to be going into a government office where civil servants were on hand to give assistance.

For the lead Tory negotiator, William Hague, it was a case of revisiting the room he has not seen from the inside since he was a young Cabinet minister, 13 years ago.

As the talks began, Nick Clegg stepped out of his Putney home to tell journalists to hint that an agreement with the Tories was nigh, though he added that any arrangement would have to "stand the test of time".

He said: "I can imagine many people are quite anxious to know what is going on – when will a decision be reached? When will an announcement be made? I simply say that all political parties, all political leaders are working flat out, round the clock to try and act on the decision of the British people last Thursday."

He had just finished a 30-minute telephone conversation with David Cameron, which was described as "positive and constructive."

The meeting in the Cabinet Office went on for more than an hour, after which a contented-looking Mr Hague emerged to announce that the two sides had made "further progress" and that he was now going to report back to Mr Cameron. "The negotiating teams are working really well together," he added.

But there was a hitch. A minority of Liberal Democrat MPs and peers agreed with Mr Clegg's publicly stated position that the political party with the highest number of votes and the highest number of MPs had the moral right to govern, but a majority balked at the notion of working with the Conservatives, with whom they had such glaring political differences.

In that three-hour meeting in Westminster Hall, Mr Clegg's MPs laid down the law to him. There would be no deal unless he had got the Conservatives to promise a referendum on proportional representation. The prospect of introducing the alternative vote system – which is not the same as PR – would not be enough.

For those watching the day's events, the first sign that something had gone wrong was when David Laws, rather than Nick Clegg, emerged to make a statement on the outcome. Mr Laws was one of those favouring a deal with the Tories.

His words were so vague that his listeners had difficulty grasping whether a deal with the Tories was on or off, but one person who understood perfectly was Gordon Brown, listening in his redoubt in Downing Street.

The Labour Party had had to stand to one side while the other two parties talked, but many of them had not acclimatised themselves to a loss of office yet. One Cabinet minister joked that he planned to barricade himself in his government office. Another said: "I hope they carry on negotiating for six months so I can stay in office."

Gordon Brown's former spin doctor, Michael Dugher, newly elected as MP for Barnsley East, met a former Downing Street colleague and asked whether he was getting ready to pack up. "Maybe not," was the jovial reply.

The Prime Minister had noted the position that Nick Clegg had laid out before the election, that a deal with Labour might be possible, but not while Mr Brown was its leader. The two men had had a revealing conversation on the telephone on Friday. It emerged that there was no need for Mr Clegg to tell the PM that his time was up, because Mr Brown had told him, in confidence, that he would resign when the moment was right.

After the meeting in Westminster Hall, Mr Brown had another brief conversation on the telephone with Mr Clegg, who told him that the negotiations with the Conservatives had faltered. Mr Brown immediately told the civil servants to set up a microphone in the street outside the door of No 10.

As he addressed the journalists outside, Sarah Brown listened from an upstairs window. At that moment, David Cameron and his senior colleagues were holding a meeting in the shadow cabinet room behind the Speaker's chair, and watched the announcement in amazement on a television screen in the corner.

A rapid discussion followed on what they should do next. The much enlarged contingent of Conservative MPs, over 100 of whom were having their first day in the Commons, gathered in Committee Room 14 in the House of Commons at 6 pm, for a noisy session.

So many journalists were waiting outside that they were blocking the corridor, and there was a confrontation with police officers who wanted them to disperse. The Serjeant at Arms, Jill Pay, had to be called to give a ruling that the journalists could say.

The meeting lasted just over an hour. As it was ending, Danny Alexander and other close advisers of Nick Clegg scurried past to another private meeting further down the same corridor. As they hurried by, they may have heard George Osborne, the shadow Chancellor, making the extraordinary announcement that the Conservative Party was softening its long, uncompromising opposition to any reform of the Commons voting system by offering the Liberal Democrats a referendum on the alternative vote system.

It was not enough to end the frantic politicking between the parties. The Conservatives say that a referendum on AV is their final offer. The Liberal Democrats say it is not enough. Some of them think that Labour, without Gordon Brown, is a more conducive partner than the Tories. Others insist that their negotiations with the Conservatives were serious, and a deal is still possible. The story runs on.

Hour by hour

* 09:57 After speaking to David Cameron on the phone, Nick Clegg says the leaders are "working flat out" to reach a deal but warns that any agreement would need to "stand the test of time".

* 10:06 Conservative negotiator William Hague says he is "optimistic" as talks with the Lib Dems over a future government resume at the Cabinet Office.

* 11:38 Hague emerges to say the talks "made further progress" and he is going to report back to Mr Cameron, adding: "The negotiating teams are working really well together."

* 11:52 Lib Dem negotiator Danny Alexander makes a similar statement; "good progress" had been made. His delegation leaves to update Mr Clegg.

* 13:30 Lib Dem MPs begin a meeting with Clegg, where they demand "clarification" from the Tories on education funding, fairer taxes and voting reform, according to frontbencher David Laws.

* 16:00 Emerging from the meeting, Lib Dem energy spokesman Simon Hughes says he would be "surprised" if a deal was done by the end of the day, adding: "I'm sure there will be a government by the end of the week."

* 16:59 Gordon Brown makes a statement on the steps of 10 Downing Street revealing that Nick Clegg has told him he wants to take forward formal talks with the Labour Party. Brown announces he intends to step down as Labour leader.

* 18:00 Conservative MPs meet Cameron in Committee Room 14 at Westminster to hear of developments.

* 19:00 George Osborne emerges to say that the Tories are offering the Lib Dems a referendum on the alternative vote (AV) electoral system as part of a "final" offer.

* 19:53 Cabinet members emerge from Number 10. Yvette Cooper says all parties must make hung parliament work.

* 19:57 Talks begin between Lib Dems and Labour. Both parties later describe them as “constructive”.

* 22:00 Lib Dems hold party meeting in the House of Commons. Senior source says decision expected in next 24 hours.

* 22:39 Harriet Harman appears to rule herself out of Labour leadership battle.