Mr Cameron, 43, becomes the youngest premier since Lord Liverpool almost 200 years ago, and the first Conservative in No 10 since John Major departed 13 years ago.
He promised there would be “hard and difficult work” ahead and said his administration would focus on “rebuilding family, rebuilding community, above all, rebuilding responsibility in our country”.
His appointment followed Gordon Brown’s resignation and brought to an end five days of tortuous negotiations in the wake of last week’s election, which resulted in a hung parliament.
After falling 20 seats short of a majority, Mr Cameron was forced to accept a deal to lead a coalition government with the Lib Dems.
It means that five Lib Dems will hold Cabinet posts and a number of high-profile Tory policies will be shelved. The Conservatives have also been forced to offer the Lib Dems a referendum on voting reform.
There will be five-year fixed-term parliaments. The Tories will increase capital gains tax sharply on the sale of second homes, shares and other “non business” assets to fund income tax cuts for lower-paid workers, which were demanded by the Lib Dems. The move is likely to prove highly controversial with core Tory supporters.
The Government will be the first coalition since Winston Churchill’s wartime administration 70 years ago.
Downing Street announced that Nick Clegg was Deputy Prime Minister, the first Liberal in a Cabinet post since Sir Archibald Sinclair was Secretary of State for Air in Churchill’s wartime government.
George Osborne, 38, becomes the youngest Chancellor of the Exchequer for 125 years. Sources close to Mr Osborne said that at the heart of the coalition deal was “accelerated deficit reduction” — a policy that the Lib Dems were fully signed up to. Vince Cable, the former Lib Dem Treasury spokesman, is likely to be given an enhanced brief which will cover business and banks.
At 10pm, Mr Cameron was greeted by loud cheers as he met his MPs in a crowded Commons committee room. Among them were William Hague, the new Foreign Secretary, Andrew Lansley, who takes over as Health Secretary and Liam Fox, who will become Defence Secretary.
David Laws, another Lib Dem MP, could become Schools Secretary, while his colleague Chris Huhne’s role was still to be confirmed. Danny Alexander, who led the Lib Dem team that negotiated the coalition deal with the Tories, will be rewarded with the post of Scottish Secretary.
There is likely to be at least one Lib Dem minister in each Whitehall department. The level of Lib Dem representation in Mr Cameron’s administration was already causing rumbles of discontent on Tory benches as MPs who have worked tirelessly in opposition for years were deprived posts in government.
Mr Cameron’s appointment was the culmination of yet another day of high political drama in Westminster, which began with increasing speculation that the Lib Dems might strike a deal with Labour to form a minority government.
Yet by 7.20pm, Mr Brown had announced his resignation, bringing an end to 13 years of New Labour rule and triggering a party leadership contest.
His departure became inevitable when talks with the Lib Dems, which provided Labour with a last-ditch chance to hang on to power, broke down.
A team of Labour negotiators met Lib Dem MPs to try to thrash out a deal but they foundered over Lib Dem demands for cuts to the deficit this year — something Mr Brown campaigned against in the election.
Support from Mr Brown’s own colleagues for a Lib-Lab pact also waned quickly and, when a succession of ministers criticised Mr Brown’s refusal to accept defeat, it was clear he had reached the end of his three-year tenure as prime minister. He decided he could no longer form a majority and visited the Queen at Buckingham Palace to tender his resignation.
Shortly afterwards, Mr Cameron made the same journey and accepted her invitation to form a government. Arriving in Downing Street with his wife, Samantha, at 8.40pm, he said: “I came into politics because I love this country, I think its best days still lie ahead and I believe deeply in public service, and I think the service our country needs right now is to face up to our really big challenges, to confront our problems, to take difficult decisions, to lead people through those difficult decisions so that together we can reach better times ahead.”
Amid cheers — and some jeers from demonstrators demanding fair votes — Mr Cameron said he and Mr Clegg were ready to put aside party differences to make “the proper and full coalition” work. Mr Cameron – who within minutes of entering No 10 had received a congratulatory phone call from President Barack Obama — said: “I believe that is the best way to get the strong government that we need, decisive government that we need today.”
And, in echoes of Tony Blair’s promise to be “servants of the people”, the new Prime Minister added: “One of the tasks that we clearly have is to rebuild trust in our political system. Yes, that’s about cleaning up expenses, yes, that’s about reforming Parliament and, yes, it’s about making sure people are in control and that the politicians are always their servants and never their masters.”
The Prime Minister accepted that he would face difficulties having to lead a coalition government.
He said: “This is going to be hard and difficult work. The coalition will throw up all sorts of challenges, but I believe together we can provide the strong and stable government that our country needs, based on those values, rebuilding family, rebuilding community, above all, rebuilding responsibility in our country. Those are the things I care about, those are the things that thisgovernment will now start work on doing. Thank you very much.”
A Downing Street spokesman said President Obama had congratulated Mr Cameron and invited him to visit the United States in July after a discussion which took in Afghanistan, the Middle East and Iran.
Mr Cameron also received a telephone call from Chancellor Angela Merkel of Germany, who offered her congratulations and invited him to visit Berlin at the earliest opportunity. The spokesman said: “They discussed the world economy and the common European agenda.”
Mr Cameron’s administration will be far from the one he had planned. Some senior Tories are likely to be unhappy with some of the policy concessions that Mr Clegg has extracted from Mr Cameron.
Crucially, Mr Cameron has saved his plans to give a tax break for married couples, although the Lib Dems will be allowed to abstain on the vote under the terms of the deal. Senior Tories confirmed late last night that they were confident they could get the flagship policy through “at some stage during this parliament”. The Tories have adopted the Lib Dem policy of removing all those earning less than £10,000 from the tax system. The flagship policy of increasing the inheritance tax allowance – which would have led to only millionaires paying the levy – will not now be introduced in this parliament.
As Mr Cameron’s deputy, Mr Clegg will deputise for him at Prime Minister’s Question Time — an extraordinary spectacle given the partisan nature of the weekly bouts.
The return of a Tory administration — albeit with Lib Dem support — is likely to calm the City. The pound rose from 1.16 to 1.18 against the euro by close of trading in London yesterday and advanced against the dollar to $1.4963, from $1.4847.
Mr Brown had earlier emerged from No 10 to announce his resignation with his wife Sarah behind him. He was leaving, he said, “the second most important job I could ever hold” after that of being a husband and father, which he would now “cherish even more”.
He concluded: “Thank you, and goodbye.”
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