Europe and Union to dominate Cameron's second term

David Cameron was last night back in Downing Street after a remarkable election victory and immediately began to address the two issues that could define his second term: the Union and Europe.

Mr Cameron defied the pollsters and his own expectations as the Conservatives won an overall majority with 331 seats in the House of Commons, routing the Labour party and his coalition partners the Liberal Democrats in the process.

Ed Miliband, Labour leader, and Nick Clegg, Liberal Democrat leader, resigned immediately, but the election also revealed a United Kingdom under unprecedented strain, after a night of triumph for Scottish nationalists.

The SNP won 56 out of 59 seats north of the border, prompting Alex Salmond, the party's former leader, to declare: "The Scottish lion has roared." The SNP refused to rule out calling next year for a second independence referendum.

Mr Cameron fuelled tensions in the Union during the election campaign by railing against the threat of a Labour government propped up by the SNP. In an attempt to heal the wounds, Mr Cameron promised on the steps of Downing Street to govern "for one nation, one United Kingdom" and to deliver new tax raising powers to the Scottish parliament "as soon as possible".

Boris Johnson has called for a "some sort of overall offer" to create a more federal Britain and Mr Cameron's allies said they "did not exclude" proposing an even greater transfer of powers to Holyrood.

Mr Cameron completed a frenetic day of political activity by reappointing George Osborne as chancellor and as de facto deputy prime minister, with a key role in Britain's proposed EU renegotiation.

British officials said Mr Osborne, officially first secretary of state, would be a lead negotiator in talks ahead of the Conservatives' planned EU referendum, scheduled before the end of 2017.

Mr Cameron's election has focused minds in Europe on the threat of "Brexit" and European leaders pressed for long-awaited guidance from Number 10 on how to answer the "British question".

On Friday congratulation notes rolled in to Downing Street from across the continent, including an invitation to Paris from France's Francois Hollande, a socialist president whose relations with Mr Cameron are far from warm.

Jean-Claude Juncker, European Commission president, congratulated Mr Cameron on his election victory saying: "I stand ready to work with you to strike a fair deal for the UK in the EU."

Mr Cameron will hope his negotiations can take place in a less fraught atmosphere after the defeat of Nigel Farage, the UK Independence party leader, in his attempt to win the South Thanet seat.

Mr Farage joined the list of party leaders resigning after their electoral setbacks, although the Ukip leader suggested that he might reapply for his job after a summer holiday.

By the close of trade in London the FTSE 100 was up 2.3 per cent, or 160 points, led by energy and banking stocks - two of the sectors that would have been under most regulatory scrutiny and higher taxes under a Labour government.

To cap a disastrous night for Labour, Ed Balls and Douglas Alexander - who had hoped to become chancellor and foreign secretary respectively on Friday - instead lost their seats.

Additional reporting by Alex Barker in Brussels

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