Opinion polls show Britain is heading towards a stalemate in parliament in its May 6 election, initially worrying financial markets although they now seem more open to the idea.

Below are recent analyst comments on the prospect of the election leaving a “hung parliament”, with no one party in overall control, looking at the impact on currency, debt and stock markets as well as moves to address Britain’s deficit.

All comments come from research notes or interviews with Reuters correspondents.

ALASTAIR NEWTON, POLITICAL ANALYST, NOMURA

I don’t think markets are fundamentally less worried about a hung parliament than they were previously. Rather, they have got more used to opinion poll volatility and are not as inclined to react violently to movements.

If Wednesday’s ComRes poll were to turn out to be an accurate forecast of the election outcome, the Tories would have a plurality of just under 300, so well short of a majority. Labour and Lib Dems would have around 233 and 86 seats respectively — i.e. 319 so still short of a majority but with the possibility of picking up sufficient support from smaller parties perhaps just to scrape together a majority.

In other words, it’s the sort of outcome I really dread because:

Brown would be determined to hang on and would try to negotiate a majority which would be tough going with one party let alone three.

Clegg would be caught in a dilemma as he has publicly stated that the party with the plurality should get their shot at forming a government, which is not what Cabinet Office guidance or precedent suggests.

Cameron would be under huge pressure from within his own party having ‘lost’ the election in the eyes of many and being faced with having to make concessions to win Lib Dems support (either in a formal coalition or for a minority Tory government) which would infuriate the Tory faithful and most of the new Parliamentary Conservative party members.

The negotiations could easily drag on for days and would almost certainly end in weak government even if they reached a conclusion. Bottom line: markets tank.

DAVID OWEN, MANAGING DIRECTOR AND CHIEF EUROPEAN FINANCIAL ECONOMIST, JEFFERIES

Apart from the uncertainty that is almost certain to dog the first few days of a hung parliament as the various parties jockey for positions and concessions, Nick Clegg has made it clear he would have difficulty working with Gordon Brown, being quoted as calling him a desperate politician, suggesting that any Lab-Lib Dem alliance would not have Brown as prime minister. The first key test will be the Queen’s speech and then, very importantly, the first budget.

What markets most fear is a hung parliament that fails to address the budget deficit. The Tories have promised to hold an emergency budget within 50 days of taking office. Arguably, there would be an emergency budget in the first three months of a hung parliament. In fact, given the pressure they would be under by the markets and the rating agencies, fiscal tightening might (and we stress the word might) occur sooner under a hung parliament.

Let’s not forget that there is general agreement that fiscal policy needs to be tightened amongst the main parties…

Fearing a full-blown currency crisis and the resulting rise in bank rate would bring a hung parliament down and force an early election later this year might be all the incentive the new government needs to move faster to address the issue.

As the examples of other economies show, hung parliaments can be successful in achieving change if they are clear about what they wish to achieve and concentrate (on) only a few things (and arguably the UK’s fiscal issue will be the most important issue facing the new government).

ALTIUM SECURITIES

A two-horse race has become a three-cornered fight, rendering the analysis of precedent from previous general elections irrelevant. Uncertainty appears to be weighing on equity trading volumes and UK financial markets aren’t acting as they “should”: sterling’s recent rally is the prime example.

Opinion polls have been volatile in the last week and are likely to remain so until polling day, hence we are making no assumptions about the election result. The consensus view that a hung parliament would be bad for sterling has been challenged by the pound’s recent strength, which could easily continue in the near term. The longer term concern is the sheer implausibility of the state of public spending plans of all parties, and gilts yields seem bound to rise. That may provide only a modest threat to UK equities, which are responding to more positive global growth indicators and insulated by their shrinking exposure to the domestic economy.

For full note, click here: http://www.capmarkets.com/ViewFile.asp?ID1=135228&ID2=408460081& ssid=1&directory=12107&bm=0&filename=Electile_Dysfunction_22_Apr _2010.pdf

WOLFGANG PICCOLI, EURASIA GROUP

The prevailing assessment is that a hung parliament would produce a government without the political will to enact stringent deficit-fighting measures. But this is rather simplistic, if not essentially misleading; the risk of political stasis from a hung parliament is overplayed.

It is true that a hung parliament would delay the formation of the new government. There is also the risk that a minority government might quickly call a second election to break the deadlock, and delay unpopular measures in the process.

A minority government would have to tread carefully in terms of budget cuts — if they are too harsh, it could prompt popular resentment and strikes, pressuring the party or parties that hold the balance of power (i.e. the Liberal Democrats) to pull the plug on the Cabinet.

A hung parliament may complicate any agreement about how to rein in the deficit, but it should not preclude it. The party in power could vote down the budget, but this option would terminate the government and trigger new elections. Any party whose actions prompted such a disaster would be caught in the fallout and most likely punished on election day.

Paradoxically, a fiscal consolidation budget supported by more than one party could enjoy greater public consent, helping to reduce the risk of popular backlash. Regardless of all the political posturing affiliated with a hung parliament scenario, the true kingmaker will be the bond market.

To avoid being punished by the markets and risking serious damage to the country’s economy, political leaders will have little choice but to tackle the deficit seriously.

DARAGH MAHER, DEPUTY HEAD OF FX STRATEGY AT CREDIT AGRICOLE CIB

Sterling is vulnerable to wobbles on news ahead of the election, but barring a catastrophe, sterling would represent a good buy after the vote. The premise that a hung parliament would create a policy vacuum is wide of the mark, as all parties know they need to bite the bullet and deal with the budget deficit. It would be wrong and simplistic to get hung up on a hung parliament.

PETER DIXON, ECONOMIST, COMMERZBANK

The policies on deficit reduction are broadly similar. The Lib Dems have been more clear-cut on what they would do and how they would cost it, but there are a lots of black hole in those numbers.

Whether you get a hung parliament or a majority government, you are going to see action pretty quickly to cut spending. It will take place over six-12 months rather than 6-12 days.

The markets are going to be concerned about how quickly they get plans on the table.

If we get a hung parliament in which the Lib Dems are the junior partner, the markets will be looking at who will be the chancellor, will it be Vince Cable or someone else. They will look at when a budget will be held. If we don’t get a commitment quickly, that will raise market uncertainty and perhaps to some degree the markets will be more nervous after the election. They are just holding fire now until the election is out of the way. There’s no point in selling off at the moment until its clear what the make-up of the government might look like.

Markets don’t know which way it’s going to drop. The politics has been overplayed anyway. That was nothing to do with a hung parliament, it was because world conditions were very difficult.

I do believe it would force parties to be less adversarial about these issues. Markets don’t care that much about the politics. They look at facts and numbers and we are pretty light on those at the moment, which is why markets aren’t really reacting.

If you get mudslinging and no facts and no figures, that’s a bad situation. But if you get a hung parliament and a cobbled-together budget with serious budget-cutting measures in place, then I don’t see the politics will play a big role.

In the longer term, the politics will take care of themselves as will the markets.

(Additional reporting by Simon Falush; Editing by Mark Heinrich)