Gordon Brown was running out of small talk. "What's your favourite colour?" he asked a paint-shop apprentice at the BMW Mini plant in Oxford last week. "Yellow," came the reply.

Brown aides looked nervously at each other: the Liberal Democrats' yellow bird flew into mind. Even when the British prime minister is on the road, there is no escaping the rise of the yellow tide which dominates the election. By Brown's side was his old ally Andrew Smith, a former cabinet minister who might be washed away by it as he defends a majority of 332 over the Liberal Democrats in Oxford East.

The spectacular advance of the Liberal Democrats has electrified this campaign, making it one of the most fascinating and unpredictable of modern times. The Conservatives, and possibly the Liberal Democrats, could conceivably come top in terms of the share of the vote. Labour insists it can still "win", but seems in a worse place than it was a week ago. Coming third in the share of the vote and still winning most seats would not give Brown a mandate to govern the country, even though there would be a good prospect of a Lib-Lab deal in such circumstances.

After tension in the Tory high command over the Nick Clegg effect, nerves have been steadied by a slight recovery in the polls and David Cameron's improved performance in the second leaders' TV debate on Thursday. "Our motto has been 'keep calm and carry on'," said one Conservative Party insider. The Tories did not see the Liberal Democrat threat coming but have finally thrashed out a strategy for tackling it.

There is palpable relief in Labour land that the party is still in the game and over Brown's better showing on Thursday. "He is remarkably resilient – indestructible," one close ally said on Friday. Labour will now play the "experience" card against both Cameron and Clegg for all it is worth. Well-timed official figures showing how fragile the the British economy's recovery is suited Labour's strategy nicely.

Brown will use this week's final television debate on the economy to tell voters not to gamble on either of the other two parties. Although the debates dominate the campaign, Labour now hopes it will become a rather more traditional one, in which issues like the economy and public services rather than the personality of the leaders come to the fore. The small print of the polls shows Brown scoring well on strength, being prime minister, even having the right ideas. The big challenge is to translate that into improved Labour ratings when he is not liked.

As with the Tories, the Clegg phenomenon has sparked tension in the Labour camp. Not everyone in the cabinet shares the appetite for a Lib-Lab coalition or deal over key Commons votes shown by the likes of Peter Mandelson and Lord Adonis. Although it may be the only way for Labour to hang on to power, the party's internal critics fear a downward spiral in which Labour is not seen as offering the change Britain demands, so the choice of change becomes between the Tories and Liberal Democrats. This is the choice the Tories and the newspapers backing them want to pose, writing Labour out of the script.

Having emphasised its common ground with the Liberal Democrats on constitutional reform, Labour will now counter the Tory plan by clobbering rather than cuddling Clegg. If Labour gets too close to the Liberal Democrats before 6 May, it only helps the Tories run their "vote Clegg, get Brown" line, which is no fantasy when you look at the polls. So Labour talk about a Lib-Lab coalition will be off-limits until 7 May, when it could be on again – unless Cameron can win more seats than Labour, in which case the Tory leader would be in pole position in a hung parliament.

When I interviewed Clegg last week, he seemed like a man who, without taking anything for granted, is now thinking about what he would do in a hung parliament. He believes a deal could be done much more quickly than people think, within days, not weeks. He is sure his party would act responsibly to ensure financial as well as political stability. He is confident of taking his party with him, and would want to.

Although Cameron and Brown bounced back in Thursday's debate, it is Clegg who is still making the running in this election. Labour and Tory strategists know that elections are decided in the centre ground but they never dreamt the man in the middle would colonise so much of it.

Nor is it enough, as the Tories assumed, to bang on about 'change', sit back and garner votes. 'Change' has become a devalued currency since all the parties profess to offer it. In his hour-long chat with me, the word Clegg used most was "different". He did the same in Thursday's debate, saying: "Don't let anyone tell you that this time it can't be different. It can."

The problem for Brown and Cameron is that Clegg really is different, and the voters like it.