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The Conservatives have backed away from a contentious proposal to slash public funding for political parties, potentially defusing a political standoff that could have led to a Tory defeat in Parliament.

"I don't think it's worth going into an election over this political subsidy," Transport Minister John Baird told Â鶹ӰÊÓnet Saturday.

The proposed Tory policy, announced as part of the government's fall fiscal update, caused a firestorm earlier this week and raised the possibility that opposition parties would cobble together a coalition to oust the Conservatives from power.

The opposition parties have been in talks to do just that since Thursday, when Finance Minister Jim Flaherty delivered his fiscal update to the House of Commons.

The fall fiscal update also raised the ire of opposition MPs because it lacked an economic stimulus package and instead focused on cost-saving measures, including a plan to cut $27 million in annual taxpayer subsidies to the political parties.

The move was interpreted by the opposition as a sign the Harper government was trying to financially cripple the other parties.

But Baird said that the Tories were aiming to "lead by example" by tightening government spending at a time when Canadians are facing an economic slowdown.

A spokesman for Harper said the Conservatives will make another announcement on Sunday, which political observers expect will include further conciliatory measures.

However, it wasn't clear Saturday if the Conservative change of heart was enough to defuse the situation and stop the opposition from banding together.

"We've just been meeting as a group, and our focus is the economy (and) making sure that we do what's best for Canadians," said NDP MP Paul Dewar.

The Liberals were also pushing for an economic aid package from the government.

"The Conservatives just don't get it," said Liberal house leader Ralph Goodale in a media release.

"What Canadians want from their government is a plan to help protect their jobs, their homes and prevent their hard-earned savings from disappearing."

Meanwhile, the gamble to cut down his political rivals may have backfired on Harper, said CTV's chief parliamentary correspondent Craig Oliver.

He added that with the Conservatives backing down, the opposition parties have become strengthened.

"They realize, in a way that they didn't before, that they are in a position to bring this government down and take power without an election."

However, Oliver stressed that the coalition would have been a messy one, and would have required all of the parties to make major concessions.

A coalition would likely include support from, rather than full participation of, the Bloc Quebecois.

Gov. Gen. Michaelle Jean would then have to decide on whether the coalition should be given a chance to govern, or if she should dissolve Parliament and send Canadians to a second election in less than two months.

On Friday, Harper delayed a non-confidence vote on the economic package by one week. He has derided the opposition attempts to form a coalition, despite trying to do the same thing in 2004 to oust Paul Martin and his liberal minority.

In an interview with Â鶹ӰÊÓnet, Democracy Watch's Duff Conacher said Harper and his Conservatives are playing political roulette.

"The opposition has called his bluff, because they know he doesn't really have a strong hand," he said, adding that the Tories only captured 37 per cent of the popular vote in the last election.

"He doesn't have that strong hand, and he's done a very poorly timed, aggressive, highly partisan and ideological move with his fiscal update."

"They went too far as they usually do, and they've poked the opposition parties in the eye."

With files from The Canadian Press