It's now official; David Cameron is the UK's new prime minister. What went wrong is unclear; as George Eaton points out, in settling for Cameron and the "alternative vote" the Liberal Democrats have retreated considerably from their previous position on electoral reform. But maybe it was seen as political suicide to side with Labour; alternatively, perhaps Labour figures that they're better off not being in power right now (some have suggested that the new PM is going to be extremely unpopular very soon, owing to the austerity measures that will be necessary). Also, Clegg and company might believe that AV is a foot in the door that could eventually lead to the adoption of multi-member STV at a later date (it would at least get the public accustomed to preferential balloting).
Incidentally, for some suggestions as to how the past election would have gone under AV and under multi-member STV, check this out (this is of necessity rather speculative, as in the real world many voters would have given their first preferences to a different party if they had confidence that their vote would count).