Hmmm...actually we have a similar situation going on in Canada at the moment. A conservative minority, and the NDP, (a left of centre party) is in very much the same situation as your Lib Dems, and they did take Jamiet's third option of refusing to do a deal. And essentially the New Democrats and the Liberals (a centre, slightly left of centre party, and for the sake of this analogy, essentially the same as Labour) have just been taking turns supporting the government on issues so as to avoid an election. The truth is no party wants an election at the moment, because the Tories still won't get a majority, the Liberals won't form the government (and they've gotten pretty used to winning) and the NDP is unlikely to increase it's seat count any either. So all you really get is a ton of political grandstanding and publicity stunts all for the sake of nothing. It's like we're constantly having a extended but incredibly low key election for several years running. (The Canadian situation is slightly complicated by the fact that we also have a large, regionally based, 4th party, but they're weird and crazy, and for the sake of making my point I'm going to pretend they don't exist.)
I'm not a conservative supporter here, and I strongly doubt I'd support the conservatives in the UK either, but I feel like maybe the Lib Dems made the right choice, if only because their decision might actually allow for some actual governance, rather than just silly showmanship, even if you don't always agree with the decisions made. And if I'm not mistaken the Lib Dems are a third party and have never formed the government, correct? Perhaps this will help change the perception of them to a party that might not be so bad after all?