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OTTAWA (Reuters) - Canada's minority government teetered on the edge of collapse on Friday, less than two months after its re-election, as opposition parties talked of forming a coalition to replace the ruling Conservatives.
Both the Conservatives and the three opposition parties were engaged in high-stakes brinkmanship over the fiscal update that Finance Minister Jim Flaherty presented on Thursday.
The opposition said the update did not contain needed stimulus for an economy increasingly squeezed by the global downturn, but they were most angered by a planned end to direct public financing of political parties.
The official opposition Liberals prepared a motion declaring a lack of confidence in the government and expressing the opinion "that a viable alternative government can be formed within the present House of Commons."
Prime Minister Stephen Harper -- who won a strengthened minority in an October 14 election -- said the government would not allow the motion to be presented or voted on until December 8.
"While we have been working on the economy, the opposition has been working on a back room deal to overturn the results of the last election without seeking the consent of voters. They want to take power, not earn it," he told reporters.
If neither side blinks, the government will likely fall, and Canada would either head into another election or into some sort of coalition led by the Liberals. The other two opposition parties are the separatist Bloc Quebecois and the left-leaning New Democratic Party.
The Conservatives say it would be an outrage for the opposition to displace a government formed by a party that had won nearly half of Parliament's seats on October 14 and garnered much more popular support than any other.
The three opposition parties held talks on Friday on forming a coalition government and said the discussions would continue over the weekend.
Liberal legislator Marlene Jennings said the talks were going "very well" and said the opposition parties could present an economic plan within days of taking office.
If the Conservatives were defeated, Harper would go to Governor General Michaelle Jean -- the representative of Canada's head of state, Queen Elizabeth -- to say he has lost the confidence of Parliament. Jean is in Europe until December 6, but says she is monitoring the situation and is ready to come home early if needed.
Harper would undoubtedly ask her to call an election but constitutional experts say she could well decide to invite the opposition to form government instead.
The prime minister said the government's next budget, expected early next year, would contain stimulus measures. Opposition parties say Canada cannot afford to wait at a time when the auto and forestry sectors are suffering badly.
Jim Stanford, an economist with the Canadian Auto Workers union, blasted Flaherty for predicting the government would stay in surplus and saying the country might enter a technical recession.
"Well excuse me, Mr. Flaherty, get your ass out of Ottawa, go into one of our communities, see someone losing their job, losing their home -- that's not a goddamn technical recession, that's a crisis," he told a meeting in Toronto called by the union to discuss the plight of the auto sector.
The political uncertainty helped push down the Canadian dollar, which has fallen sharply against its U.S. counterpart in recent weeks.
"A lot of investors are rewarding governments that are showing strong leadership on the financial crisis and it looks like we're (Canada) going to be thrown into disarray," said David Watt, currency strategist at RBC Capital markets.
One obvious challenge for a coalition is that it would have to work with the Bloc Quebecois, which is seeking independence for the French-speaking province of Quebec.
"Stephane Dion and the NDP plan to make this happen by accepting the support of a party that wants to destroy the country," noted Harper.
There is no talk of Bloc ministers in any coalition cabinet but the party is considering an arrangement whereby it would support a Liberal-NDP coalition on a number of issues.
The Conservatives have 143 seats in the 308-seat House of Commons, plus two allied independents. The Liberals have 77 and the New Democrats 37 -- totaling only 114 and well short of the 155 needed for a majority. The Bloc has 49 seats.
Additional reporting by David Ljunggren and Louise Egan in Ottawa and John McCrank in Toronto; editing by Rob Wilson