THE Conservatives once looked a nailed-on certainty for a general election triumph but nerves over a less-than-decisive outcome are now spreading far beyond Tory HQ.
A diminishing poll lead - and with it shortening odds on the UK’s first hung Parliament since 1974 - has sparked fears the tough medicine needed to deal with the country’s dire financial state could be delayed.
Confidence over the political appetite to deal with the impact of a recession which will push borrowing to £178 billion this year and £176 billion in 2010/11 is key if international investors are to continue buying UK debt.
But the world’s biggest buyer of bonds, Pimco, has already shaken the market once this year with the warning that UK gilts are "resting on a bed of nitroglycerine" given the dire state of the finances.
While ratings agencies have so far refrained from slashing the UK’s gold-plated AAA credit rating, they will swoop if a political vacuum fails to deliver an clear deficit reduction plan.
The turmoil caused by fears over a Greek sovereign default is a sobering example of what can happen in uncertain markets, while for buyers of UK debt, the Bank of England is also the elephant in the room.
Prices are likely to turn south when it begins to unwind quantitative easing at some point in the future through sales of its £200 billion in gilts - representing around 25% of the current stock.
Regulatory uncertainty also beckons at a sensitive time for the banking sector as the Tories plan to scrap the Financial Services Authority and return supervisory powers to the Bank of England.
These plans could be thrown into limbo for months and the situation will not be helped by a new chief executive at the helm when current boss Hector Sants steps down in the summer.
Jonathan Loynes, chief European economist at Capital Economics, said a hung Parliament was a "very real and, on paper at least, very worrying prospect".
He said: "There is still much uncertainty over just how quickly and by how much the fiscal outlook actually will improve after the election.
"A hung parliament could delay a fiscal squeeze and hence severely test the patience of the credit rating agencies."
Shadow Chancellor George Osborne seemed to herald a new age of austerity last year with his deficit-slashing commitments. But there have been few firm measures so far. although an emergency Budget is expected within weeks of an election.
Despite the Government’s case that cutting too soon could wreck a fragile recovery, Osborne’s tough message struck a chord with a public aware that the country has been living beyond its means for too long.
But as the day of reckoning approaches, Tory resolve is faltering with their poll lead after a difficult month politically - marked by a much-mocked poster campaign and confusion over plans to "recognise marriage in the tax system".
This - and much weaker than expected 0.1% growth during the final quarter of last year - has brought a shifting of the mood music on the deficit as election jitters strike, with the talk now of "making a start" rather than savagery.
The Conservatives must also contend with the in-built disadvantage of the UK’s first-past-the-post system which leaves the Tories short of an overall majority if their high single-digit lead plays out at an election.
The ’hung parliament’ scenario coming into view is putting pressure on the pound as well as lifting UK government gilt yields.
Sterling has fallen from highs above 1.68 against the dollar to 1.56 since the Tories’ lead began narrowing late last year - as predicted by forecasters such as the Centre for Economics and Business Research in December.
Gilt yields have climbed higher as the market-perceived riskiness of Government debt climbs along with the chances of no overall majority for either side or even a Labour victory.
The last time the country was presented with a hung Parliament, between February and October 1974 when Harold Wilson finally secured a majority, the FTSE All-Share fell by 48% in six months.
Inflation hit 17%, interest rates stood at 12.5% and gilt yields jumped from below 11% to almost 15%. The Bank of England would spend billions supporting the flagging pound before an IMF bailout two years later, as the UK economy reeled from the oil crisis as well as rampant trade unions.
With the current woes of Greece and fears of sovereign debt default shaking the market, experts point out that in some respects the UK position is more perilous than the 1970s.
JP Morgan’s head of economic research Malcolm Barr said the UK’s fiscal position looks "significantly worse" now than in the 1970s, with borrowing soaring to 12.7% of GDP compared with just 7% more than thirty years ago.
But he hastens to add that in many ways the country is likely to fare better due to a much greater political will to cut spending than back in the 1970s and the era of beer and sandwiches at 10 Downing Street.
Then, Harold Wilson struck the ’Social Contract’ with the trade union movement to limit pay demands in return for the repeal of Ted Heath’s Industrial Relations Act, but the agreement failed to bring inflation under control.
Mr Barr added: "All three major parties have explicitly recognised the need for fiscal consolidation and to limit spending and tax commitments as a result. Back in the 1970s, the need to make such choices was recognised later, and faced more serious public resistance."
The UK now also has a far greater pool of capital worldwide on which to draw to fund the deficit, he adds, while the influence of organised labour has diminished significantly.
In 1974 Heath went to the country with the question "who governs Britain?" in the face of a miners’ strike and a three-day week - and lost. In 2010, public sector unions are likely to rail against a savage programme of spending cuts but they will not bring down the Government.
Markets, at least, would welcome an incoming administration with a clear mandate to slash rather than the limbo of minority government.
JP Morgan’s Allan Monks says months of doubt lie ahead in what is likely to be the most fiercely-fought political battle in years. He warns: "The result is likely to be uncertain up to the election itself."