UK's PM seeks to save government with reshuffle

The pound hit a two-week low against the euro after the resignation of more senior ministers, making four in as many days, and local election results that pointed to expected big losses for Labour but no clear swing to the opposition Conservatives.

The market is waking up to what a mess politics are in the UK, RBC currency strategist Adam Cole said.

There was some relief for the market, however, from news that finance minister Alistair Darling was to remain in his job, offering continuity in what is the most important political portfolio for markets. Bond prices were unaffected and the main stock index was up 1.4 percent.

Media reports said Brown had given up on a plan to replace Darling with his close ally Ed Balls after Darling refused to move. Darling has won praise for his efforts to pull Britain out of its deepest recession since World War Two.

A gathering rebellion against Brown has increased the possibility of a snap election in the autumn rather than the widely expected date of May. Some Labour deputies have been gathering signatures to unseat Brown.

Defense Secretary John Hutton and Work and Pensions Secretary James Purnell, seen by some as a potential leader of the party, became the latest cabinet ministers to quit.

Hutton said he was still committed to supporting Brown and would quit parliament at the next election, although Purnell made his aim abundantly clear.

I now believe your continued leadership makes a Conservative victory more, not less likely, he told Brown in a letter published in newspapers. I am therefore calling on you to stand aside to give our party a fighting chance of winning.

LAST CHANCE

Friday's cabinet reshuffle, the second in eight months, may be Brown's last chance to rally his party around him.

His departure after only two years would add to pressure on Labour to bring forward a general election that does not have to be held until June next year.

The opposition center-right Conservatives are well ahead in the polls and would be the clear favorites to return to power for the first time since 1997.

Whoever wins faces the task of reducing borrowing from a level of 175 billion pounds ($282 billion) this year -- more than 12 percent of GDP -- and will have to raise taxes and cut spending.

The government is collapsing in front of our eyes, Conservative leader David Cameron said on his website, pressing his call for an early election.

Sterling fell to a 10-day low against a trade-weighted basket of currencies, while the euro rose to a two-week high of 88.67 pence, a gain of almost 1 percent on the day, before falling back to 88.14.

Against the dollar, sterling stood at around $1.6017, a fall of around 0.7 percent, also up from earlier lows.

POLL EFFECT

Early results in local elections pointed to the widely expected heavy losses for Brown's Labour, with its lost votes spread among opposition parties, and no clear beneficiary.

That suggests that an early parliamentary election might not produce as big a Conservative majority as polls have indicated.

The market would like to see a more positive clear-cut swing toward the Conservatives and the vote indications so far only increase the political uncertainty, RBC's Cole said.

News reports said up to 75 Labour members of parliament -- around a fifth of the total -- were ready to sign a letter calling on Brown to go, even before Purnell's announcement. But at the same time, close allies and other senior Labour figures rallied around Brown to ward off the insurrection.

Alan Johnson, who Brown moved from the health ministry to the more powerful interior ministry, is seen as the front-runner to replace Brown.

But his decision to go along with Brown's reshuffle suggests there is a core of support for the prime minister in cabinet.