'The solution must be quick because the EU presidency must be run

by a fully functioning government'

Czech President Vaclav Klaus accepted Prime Minister Mirek Topolanek's resignation yesterday and said a new majority-backed cabinet must be formed soon to tackle the economic crisis and the Czech EU presidency.

But Mr Klaus set conditions that are likely to require a deal between the two main parties and could be difficult to reach.

Mr Topolanek quit after several government defectors joined forces with the leftist opposition in a no-confidence vote on Tuesday, toppling the minority cabinet amid a severe economic downturn and halfway through the six-month EU leadership term.

The eurosceptic Mr Klaus, a political rival to Mr Topolanek and the former leader of his right-wing Civic Democrats, has the sole right to appoint the new prime minister. Until the nominee forms a cabinet, the old centre-right three-party administration will remain.

The main parties have said a new cabinet should lead the country toward an early election.

"The solution must be quick ... due to the economic crisis and the EU presidency, which must be run by a fully functioning government," Mr Klaus said. That went against suggestions by government and opposition leaders that Mr Topolanek's team might stay on, even after the resignation, until the end of the presidency in June.

Analysts have said that changing the government during the presidency could weaken its clout. Mr Klaus has played down the presidency and said the EU's big powers call the shots. But Mr Topolanek's fall has not helped his chances of playing a serious role in consensus building on issues such as the economy and ties with Washington.

Analysts said that was also damaged on Wednesday when he branded US plans to spend trillions of dollars to boost the economy as the "road to hell".

The political crisis has had a limited impact on financial markets. The Czech currency, the crown, dipped after the no-confidence vote but recovered against the euro yesterday.

Cabinets in Latvia and Hungary have collapsed under pressure from the financial crisis, although that has had a smaller impact in the Czech Republic, where the government was felled by personal rivalries in Mr Topolanek's party and within a junior coalition partner, the Greens. The opposition has blamed the government for economic mismanagement and criticised reforms including a flat income tax, small fees for doctor visits and welfare cuts. The opposition Social Democrats propose raising spending to fight the economic crisis which will lead the Czech economy into recession this year.

Rebels

Mr Klaus said any government would have to be based on the support of political parties, and not defectors -- a clear indication he would not back a re-creation of Mr Topolanek's three-party minority cabinet, which was initially backed by two rebels from the opposition.

"I am ready to appoint only a government that will be based on a political agreement in the lower house," Mr Klaus said. He said he could reappoint Mr Topolanek, or name someone else. Given the parties' power in parliament, it will be difficult to form a majority-backed government without an agreement between the two biggest parties, the Civic Democrats and the Social Democrats.

"This means that any solution -- be it a political government, a caretaker government or early election -- is dependent on some form of co-operation between the civic and social democrats," said Tomas Lebeda, analyst at the Czech Academy of Sciences.

So far, the only common ground appears to be a preference for an election before the next scheduled polls in mid-2010. The constitution makes it difficult to organise early elections, and analysts have predicted a protracted political stalemate.

The Social Democrats want a government of non-partisan experts until early elections this autumn or spring next year.

The Civic Democrats insist only Mr Topolanek can lead the new cabinet, and an election should be called in the summer.

"I am also in favour of speed," Mr Topolanek said after meeting Mr Klaus. "But not just speed of forming a cabinet but also speed of arranging an early election as the only way out."

The stalemate has cast a shadow over the ratification of the Lisbon Treaty.

It was stuck down in the Czech Senate, where many Civic Democrats, cheered on by Mr Klaus, oppose it.

- Jan Korselt in Prague