Plaid Cymru has decided to hold talks with Labour on the possibility of forming a Welsh assembly coalition.
The two largest parties in the Senedd may form a coalition
Plaid's 15 AMs have agreed unanimously to the discussions, which could see an historic first deal between two parties which have long been bitter rivals.
It is understood it has been guaranteed a referendum on full assembly powers, but no offers yet of cabinet seats.
But the future assembly government remains unclear, as Plaid will continue to talk to the Tories and Lib Dems.
After Plaid AMs met on Tuesday evening, their leader Ieuan Wyn Jones said: "We've had a request from the Labour Party to consider a number of issues they wanted to raise with us in discussion and that includes a formal coalition between the Labour Party and Plaid Cymru.
"I am not at liberty to disclose the contents of what will be discussed but the group felt they were matters that needed to be discussed."
A Labour spokesperson said First Minister Rhodri Morgan would be in touch with Mr Jones on Tuesday morning "to discuss an agenda for the talks, to set out teams for the negotiating process and to set out a timetable".
The development is the latest in a series of twists and turns in Cardiff Bay since the 3 May election left Labour the largest party with 26 seats, but five seats short of an outright majority.
Former Ceredigion Plaid MP Simon Thomas said it was exciting that there seemed to be a change in Labour ranks.
First Minister Rhodri Morgan may have to share power with Plaid
"I think the one thing it will raise with many Plaid members is serious questions about what Labour's motives are and what we can get out of this for the benefit of all of Wales and not just for the benefit of parties concerned," he said.
Mike German, leader of the six Liberal Democrats in the assembly, said he "wouldn't have expected anything different from Labour".
"They get desperately keen on making sure they hang on by their fingertips to power," he said.
He said Plaid had to decide whether its aspirations would be better met by a coalition with Labour or by a rainbow alliance with his party and the 12 Conservative AMs.
"Given the support there is for the three-way coalition they will probably want to continue that discussion and I suspect... they are going to have to make a choice between one or the other.
"We will know the answer to that by the end of the week ,but I think it is a lot to ask of someone to give up the chance to be in charge."
Nick Bourne, leader of the Welsh Conservatives, said the latest development did not come as a surprise.
"We always knew there would be more twists and turns in efforts to secure a stable, majority government in the national assembly.
"We also know that Rhodri Morgan and his Labour colleagues will do and say anything to hang on to power," he said.
"Our position remains unchanged. We think Wales will be best served by a non-Labour alternative."
The latest move comes just over two weeks after Rhodri Morgan was installed as first minister leading a minority administration.
Plaid's decision to enter serious talks with Mr Morgan will have come as a blow to the Conservatives and Liberal Democrats.
They believed Plaid favoured forming a so-called "rainbow coalition" administration with them.
This view appeared to have been reinforced on Monday night when the Plaid leader seemed to have effectively rejected overtures for co-operation from Labour.
Mr Morgan wrote to Plaid and the Liberal Democrats last week.
He offered an inquiry into the way the Welsh assembly is funded, a temporary halt to changes to hospital services and a group to examine the conditions for a referendum on assembly powers.
Mr Jones demanded a better offer from Mr Morgan and it appears he has received one.
Plaid's national council will meet on 7 July in Aberystwyth to discuss whether or not it endorses the proposal for a coalition between itself, Lib Dems and Conservatives.