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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.
If neither side blinks, the government will likely fall, perhaps as early as Monday, and Canada would either head into a snap election or into some sort of coalition led by the opposition Liberals.
"Canadians ... just might get a Christmas present next week and have the Conservatives turfed, which is exactly what they deserve for their mismanagement of the economy," Thomas Mulcair, deputy leader of the leftist New Democratic Party, told CBC television.
The Conservatives were in no mood to back down and argued it would be an outrage for the others 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 opposition is trying to usurp the decision of Canadian voters only two months ago by changing the government without going to the people," Kory Teneycke, spokesman for Prime Minister Stephen Harper, told reporters.
"We received a strengthened mandate. The Liberals received their lowest percentage share of the vote since Confederation (in 1867). The government's agenda on the economy is moving forward."
The Liberals prepared a motion for possible debate on Monday 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."
If the Liberals go ahead with the motion, a vote would normally take place on Monday shortly after 6:30 p.m. (2330 GMT), though it can be postponed till Tuesday. It the motion passes, the government falls.
Another opportunity to bring down the Conservatives would come in the first vote on the fiscal update, also on Monday evening. But the opposition could decide to wait for a vote on the separate financial legislation that will include the contentious party-financing proposal.
No date has been set for a vote on the party subsidies, so weeks of delay are possible. But Teneycke said the government had no intention of watering its measures down.
"We're going to stand our ground on principle," he said.
The uncertainty helped push down the Canadian dollar, which has fallen sharply against its U.S. counterpart in recent week.
"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.
The three opposition parties -- the Liberals, the NDP and the separatist Bloc Quebecois -- have been holding intensive talks. Former Liberal Prime Minister Jean and former NDP leader Ed Broadbent were also working behind the scenes.
"Mr Harper has to understand that an election isn't the only option and we will do what is necessary to help the Candian people, pure and simple," senior Liberal legislator Gerard Kennedy told Reuters in Toronto.
Nobody is talking about having a separatist minister in cabinet but the Bloc is considering an arrangement whereby it would support a Liberal-NDP coalition on a number of issues. "We are open to a coalition that would respect Quebec's interests more," Bloc leader Gilles Duceppe said.
The Conservatives were already criticizing the idea that the Liberals and NDP might team up with separatists.
"They'll have to answer to the Canadian people if they make certain coalitions," Flaherty said..
If the Conservatives lose confidence votes, 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 but says is monitoring the situation and is ready to come home if needed.
Harper would most likely ask her to call an election but experts said she could also decide to invite the opposition to form government instead.
The Conservatives have 145 members, including two allied independents, in the 308-seat House. 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