The Christian Democrats (CDA) have been trying to reach an accord with the Labour party, which came a close second in the vote.

Balkenende: Wanted to govern without Labour

But the two parties, neither of which could govern on its own, have failed to agree on a package of spending cuts.

Correspondents say they are expected to continue their negotiations despite the latest setback.

The country meanwhile remains governed by the outgoing right-wing coalition, including the anti-immigrant Pim Fortuyn List (LPF) which suffered a heavy defeat in the 22 January election.

Labour leader Wouter Bos said that despite the setback the two parties would probably still have to work together.

Labour took 42 seats in the 150-seat parliament to the CDA's 44.

War disagreement

The CDA's leader, Prime Minister Jan Peter Balkenende, made it clear during the election that he would prefer to govern without Labour.

He could in theory still form a coalition with his previous partners - the free-market Liberals and the LPF.

But inclusion of the LPF would risk a repeat of the infighting which brought down his last government.

This is not the first time that Labour and the CDA have fallen out over policy during the talks.

Two weeks ago there was a row over the US-led conflict in Iraq, with the CDA strongly supporting the war and Labour opposing it.