Liberal Democrat Assembly leader Michael German

Mike German, who would be confirmed as Deputy First Secretary if the deal goes through, said the agreement would deliver proper devolution and stable government for Wales.

In a statement on Thursday Rhodri Morgan said: "It is an historic partnership agreement which if given the go-ahead by the executive of the Welsh Labour party and the Liberal Democrats at their conference on 14 October, will pave the way for a new style of government for Wales".

Labour hold 28 seats in the Assembly and the Liberal Democrats six.

The coalition follows the model operating in the Scottish Parliament and will have to be agreed by Liberal Democrat party members.

The Liberal Democrat leader in the National Assembly, Michael German, said the deal meant Wales would now have a "clear and stable" government.

"This historic document contains over 100 Liberal Democrat proposals," he said.

National Assembly leader Rhodri Morgan

"It gives Welsh Liberal Democrats an opportunity to implement ideas which we have cherished and developed for generations.

"And most important of all, it means that we can now make a real difference in education and health and for rural Wales.

Labour said it had not made any concessions.

The party said there was a need to "draw a line in the sand" between them and the Liberal Democrats and what they are calling the "forces of conservatism" - the Conservatives and Plaid Cymru.

Labour stressed the deal had not been dictated by either Tony Blair or Charles Kennedy.

Opposition warnings

Nick Bourne AM, who leads the Conservative group in the Assembly, has warned that the agreement could be to the detriment of Wales.

Mr Bourne claimed the deal was all about the personal ambition of Liberal Democrat leader Michael German and that the Labour party would now be able to ride rough-shod over the remaining opposition.

Plaid Cymru leader Ieuan Wyn Jones said: "It was inevitable that some form of coalition or pact would take place, because it is clear that Labour has been unable to deliver any form of stable government.

"We doubt however if this will bring long-term stability because Labour has been so devoid of leadership and willingness to challenge the London line. This will not change, even with a coalition government.

"One question that remains unanswered is: was this deal stitched up in London, or is it a genuine deal made in Wales?"

Coalition 'a disgrace'

The deal has also been criticised by a Labour MP.

Llew Smith, Labour MP for Blaenau Gwent described the announcement of a coalition as a "a disgrace "- if he had wanted a coalition with the Liberal Democrats, he would have joined the Liberal Democrats.

He said that he totally disagreed with the way Rhodri Morgan had dealt with the issue, and that the matter should have been brought to last weeks party conference in the form of a special resolution.

Mr. Smith said that Labour members had been treated with disdain.