SYDNEY -- Australia's ruling Liberal Party is bracing for defeat in Saturday's by-election for the seat formerly held by ousted Prime Minister Malcolm Turnbull. The loss will result in fragile minority rule until the next national poll -- due by May -- and virtually guarantee a fractious parliament.

The Australian Broadcasting Corporation reported that the Liberal Party lost the by-election in suburban Sydney.

Prime Minister Scott Morrison's government controls half the 150 seats and the opposition Labor Party 69. The remaining six are in the hands of Greens and other crossbenchers. Morrison should be able to cling to his post, thanks to deals with a number of independent and other crossbench members over key laws on spending and confidence. Now, with no party claiming a majority, the role of minor parties in forging policy becomes even more apparent.

An early general election is a distinct possibility, some commentators say, as the ruling coalition will find itself faced with crushing negotiations to pass legislation. And a lengthy deadlock will only further erode voter confidence. Stewart Jackson, a lecturer in politics from the University of Sydney, thinks an election may be held in "February as opposed to May."

The Liberal party also faces two important state polls in the country's most-populated regions, Victoria in November and New South Wales in March.

In Saturday's by-election, former city councilor Kerryn Phelps, a prominent figure in the medical community and an independent, is expected to take Turnbull's vacated seat in Sydney's wealthy enclave of Wentworth, according to the ABC. The party has long counted socially progressive Wentworth a safe seat -- it has never been held by Labor -- and the defeat will be a bitter blow for Morrison, who will have lost his first election since assuming office in August.

Wentworth stretches from Bondi Beach to the inner city, where Phelps has skillfully courted the liberal vote with renewable energy policies while showing a fiscally conservative hand by advocating low company taxes and a freeze on changes to superannuation.

The Liberal Party was reeling even before the contest began. Already appalled by months of vicious infighting, voters watched Turnbull's takedown in August and subsequent resignation from parliament, which threw open the race for his district. Comfortably holding his Wentworth seat for 14 years, the former prime minister would always have been a tough act to follow.

Morrison countered Phelps by stumping vigorously for Dave Sharma, a former ambassador to Israel. But the race took a startling twist on Tuesday when Morrison appeared to woo Wentworth's sizable bloc of Jewish voters by floating the idea of moving the Australian embassy from Tel Aviv to Jerusalem. The proposal, which the prime minister credited to Sharma in a news release with Foreign Minister Marise Payne, was viewed as a cynical ploy by critics, who also noted it would reverse long-standing foreign policy.

The fallout quickly spread beyond Sydney. On the same day as Morrison's proposal, Indonesia -- Australia's Muslim-majority neighbor to the north -- said it would weigh putting the brakes on a joint free trade agreement, reported ABC News. Eight years in the making, the pact was expected to be signed during November's APEC summit in Papua New Guinea.

"Indonesia has asked Australia and other countries ... [to] not take action that could threaten the peace process itself and global security," Indonesian Foreign Minister Retno Marsudi told local media. Australian news also reported a harsh exchange via social media between the two countries' foreign ministers.

Indonesian-Muslim protesters took to the streets in the tens of thousands when the U.S. moved its embassy to Jerusalem in May.

Following the Wentworth defeat, Morrison's government is likely to tread carefully in parliament in the lead-up to the next election. "I don't think that the coalition will put anything to vote ... of any controversial significance," said Professor Ken Baldwin of the Australian National University. "There is the risk that Kerryn Phelps could vote against them. Then you just need one defection, and then the whole government falls."

Nikkei staff writer Sarah Hilton in Tokyo contributed to this report.