LONDON, (Reuters) – New Prime Minister David  Cameron’s Conservatives and the smaller Liberal Democrat party  struck an agreement last night to form Britain’s first  coalition government since 1945.

The agreement between the two parties, reached five days  after an inconclusive election, ends 13 years of rule by the  centre-left Labour Party under Tony Blair and his successor  Gordon Brown.

The untested partnership will have to clean up public  finances, with a record budget deficit running at more than 11  percent of national output.

Markets welcomed the agreement, hopeful that a government  led by the centre-right Conservatives will take swift action to  bring down spending.

“This is going to be hard and difficult work. A coalition  will throw up all sorts of challenges. But I believe together we  can provide that strong and stable government that our country  needs,” Cameron said in his first speech as prime minister.

The Liberal Democrats were also celebrating after decades  spent in the shadow of Labour and the Conservatives.

“There will of course be problems, there will of course be  glitches. But I will always do my best to prove new politics  isn’t just possible, it is also better,” Liberal Democrat leader  Nick Clegg, who will be deputy prime minister, told reporters.

His party put its final seal of approval on the deal at a  meeting that ended after midnight yesterday.

Cameron, a 43-year-old former public relations executive,  took over as prime minister just hours earlier when Brown  admitted defeat in his own efforts to broker a deal with the  Liberal Democrats.

He is Britain’s youngest prime minister in almost 200 years.

The Liberal Democrats have more in common with Labour in  policy terms, but talks to form what the media called a  “coalition of losers” swiftly fell apart.

The Conservatives are the largest party in parliament after  last week’s election but fell 20 seats short of an outright  majority. Combined with the Liberal Democrats, they will have a  majority of 76 seats.

OSBORNE TO BE FINANCE CHIEF

The prime minister’s office announced late yesterday there  would be five Liberal Democrats in cabinet in total, including  Clegg.

It did not name the other four ministers but there were  reports Vince Cable, the highly regarded Liberal Democrat  Treasury spokesman, would be given a role overseeing banking and  business.

A Conservative source said the two parties had agreed to  significantly accelerate deficit reduction plans. The focus  would be more on cutting public spending than on raising taxes.

Another Conservative source said George Osborne, a close  friend and ally of Cameron, would become the new Chancellor of  the Exchequer (finance minister).

Some in the finance industry have expressed doubts about  Osborne because he is untested and takes over an economy  emerging from the worst recession since World War Two.

William Hague, a former Conservative leader and one of the  main negotiators with the Liberal Democrats, will be the foreign  minister.