Plaid leader Ieuan Wyn Jones could be in Rhodri Morgan's cabinet

The decision was taken unanimously by the party's National Executive Committee at a meeting in Aberystwyth.

First Minister Rhodri Morgan has offered a deal to Plaid to support his minority assembly government.

Plaid could still opt for a rainbow coalition with the Tories and Lib Dems, but this was not discussed on Saturday.

A Plaid spokesman said a rainbow deal was not considered by the executive committee, as no request was made to do so by the party's group of AMs, which had met earlier in the day.

When asked if the rainbow coalition was dead, Plaid leader Ieuan Wyn Jones said that it was not.

HOW THE ASSEMBLY STANDS Labour - 26 seats Plaid Cymru - 15 Conservatives - 12 Liberal Democrats - 6 Independent - 1

Plaid will now concentrate on discussions with Labour, and Mr Jones predicted that the discussions will now take days and not weeks.

Both Labour and Plaid are set to hold special conferences in July in which the wider party memberships would have their say on any coalition deals.

A spokesperson for Welsh Labour leader and First Minister Rhodri Morgan said Plaid's decision to continue talks was "a positive outcome in both parties".

"Meetings will now resume on Monday so that a specific fully worked-up set of proposals are available for the respective party conferences to consider," said the spokesperson.

Reacting to the news, a spokesperson for the Lib Dem assembly leader Mike German said Plaid cannot "keep two balls in the air indefinitely".

"I hope the party will move swiftly to make a firm recommendation as rapidly as possible. The people of Wales want certainty."

And Welsh Tory leader Nick Bourne said he believed the rainbow alliance was still a possibility.

"I remain confident that we can secure the necessary support across all three opposition parties for a non-Labour coalition government in Cardiff Bay," he said.

Earlier, Plaid chair John Dixon had said Saturday's meeting was the first opportunity for the party's National Executive to look at all the options since the election.

"To date, the only decision that Plaid Cymru has taken since the election has been to talk to everybody and see what might be possible," he said.

"There has to come a point... at which you start looking at these options and start saying 'Well, which actually represents the best way forward for Wales?'"

Labour

On Friday, Welsh Labour's party national executive decided to hold a special conference on 6 July.

Labour party's chairman, Tecwyn Thomas, said the executive thought it was "right and proper that the wider party be consulted in the fairest and most open way possible".

The latest round of discussions came after Labour fell five seats short of an outright majority in last month's election.

Although Mr Morgan was reinstalled in the top job, he could be forced out if Plaid team up with the Conservatives and the Lib Dems.