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The political risks of Britain's general election are being underpriced by the financial market. So says BlackRock, the world's biggest fund manager, which has warned that the May 7 vote could lead to a disunited kingdom governed by a fractious coalition of Labour left-wingers and Scottish nationalists.

For investors, that could mean an end to Britain's economic recovery, a surge in debt to finance more government spending, rising interest rates and a weakening pound. Private investors in Britain seem to agree; they have been pulling their money out of stocks and shares. There was a net outflow of a half-billion pounds by retail investors in February, the biggest withdrawal since the credit crisis in 2008, but institutions are still turning a blind eye to the possibility of what an election upset would mean to the economic recovery. In March, the FTSE100 index of leading shares reached an all-time high.

This British election is baffling, unsettling and it is breaking all the rules because, instead of the usual Punch-and-Judy head-to-head conflict between the Tories and the Labour Party, regional and special-interest groups are setting the agenda.

Opinion polls suggest there will be no clear majority for either of the main parties while the Liberal Democrats, the Tory coalition partners, are expected to lose heavily. Instead, the party that wins the most seats will likely be forced to do deals with radical or nationalist groups such as UKIP, the ultra-conservative anti-EU party, or the left-wing Scottish Nationalist Party.

The predicament facing both Prime Minister David Cameron and Labour Party leader Ed Miliband was made crystal clear in a staged formal television debate involving all the party leaders. Mr. Cameron and Mr. Miliband made little impact while post-event opinion polls suggested that UKIP leader Nigel Farage had done well – but It was Nicola Sturgeon, the SNP leader, who received the most plaudits. In a canny piece of Scottish electioneering, Ms. Sturgeon delivered a vicious stab in the back to Mr. Miliband in declaring that she would support a Labour-led government that raised the top rate of tax to 50 per cent.

At the same time she managed to appear statesmanlike and unswerving in her defence of traditional Labour issues, such as the National Health Service.

Scotland is one of Labour's traditional heartlands, but the party is expected to lose heavily there as nationalists, furious over last year's failure to win the independence referendum, rally to Ms. Sturgeon's challenge. Her predecessor, Alex Salmond, who is standing as a candidate for a Scottish constituency MP in the election, boasted in January that his party would dictate the content of a future Labour government's budget, demanding huge spending powers for Scotland as the price for keeping Mr. Miliband in Downing Street.

It is this loss of Westminster power that BlackRock suggests would send Britain into constitutional crisis and an economic tailspin. The fund manager paints a scenario that ought to resonate for Canadians: "Imagine a similar situation in Spain if the central government were dependent on Basque or Catalan separatists, or a Canada beholden to the Parti Québécois."

For the Tories, who have fought a very dull campaign, pressing the argument of stability, steady growth, rising employment and deficit reduction, the success of the SNP is music to their ears. It draws attention away from the threat that the Tories will find themselves in bed with UKIP's xenophobes and closet racists.

Conservatives hope that fear of Scottish rule in Westminster will rally middle-of-the-road English Labour voters and UKIP supporters to abandon their allegiance and vote for a continuation of the Conservative-led government.

Yet, beneath the surface turmoil, there may be a political upheaval even more interesting than a SNP or UKIP rebellion.

It was telling that, following the TV debate, several stalwart Labour backbench MPs tweeted their admiration of Ms. Sturgeon's defence of "Labour" values, so much more commanding and impressive than the fumbling, mealy-mouthed performance of the Labour leader.

She is the sort of leader they like – solid left-wing, fiery, straight-talking and punchy – the kind of Labour politician that goes down well in traditional Northern English cities, constituencies that suffer the same economic neglect and unemployment that drive the SNP vote in Scotland.

Could there be a bigger political prize looming for the SNP? This could be the election that splits the British Labour Party into a Northern group that sides with the Scottish nationalists, offering a new home for British socialists, leaving a rump party to continue its hopeless battle against a largely Tory and prosperous England of the southern shires.

It is no accident that Mr. Cameron and the Chancellor of the Exchequer, George Osborne, has set as the big project for a second term the "Northern Powerhouse." It's an attempt to revive the industrial economy of the north of England, linking its great cities Liverpool, Manchester, Leeds and Sheffield with state-funded rail and road infrastructure.

After decades of failed efforts by successive governments to restore the North to the status and prosperity it achieved in the Victorian era, there are signs of revival and it is probably the last chance for a Tory government to make a difference. But in this battle for the hearts and minds of the English working class, it is Scottish who are fighting the corner of the left.

The Tories know that another failure would seriously divide not just Scotland from England, but would tear apart England itself.

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