The party’s state director Damien Mantach has confirmed that a candidate for the new seat - which takes in most of retiring Nationals MP Bill Sykes’ seat of Benalla - would be announced next month.

It puts an end to months of speculation over whether or not the Liberals would run a candidate opposite The Nationals Steph Ryan, in apparent defiance of the coalition agreement signed in 2008.

The agreement, signed by Nationals leader and Deputy Premier Peter Ryan and former premier Ted Baillieu, excludes either party from running a candidate in a seat being vacated by a retiring member of the other party - but interpretations have varied on what this means with electorate boundary changes and new seats.

The Nationals have, for example, said they won’t run a candidate in Eildon, a new seat including parts of the old Benalla and Seymour electorates that sitting Liberal MP for Seymour Cindy McLeish will contest.

The only other three-cornered contests so far are in Ripon and Buninyong, both currently Labor-held.

It was reported earlier this year the Liberals had vowed to honour the agreement, sparking concern from local branch members.

Chair of the Euroa state electorate conference, Jason Ronald, said it was in the best interest of the Coalition to both run candidates.

“It’s a new seat and it’s yet to be tested so it seems fair to everybody that we all have a go,” he said.

“I’m keen to have a Liberal candidate who Liberals in the area can vote for.”

Asked if he believed running a candidate would affect the parties’ relationship, Mr Ronald said: “We’ve worked very well together for many years and I don’t think locally we will see any problem with that.”

“It will be a friendly competition and may the best person win,” he said, adding the branch was unlikely to “go overboard” with its campaign spending.

The Nationals state director Jenny Hammett said they would remained focused on the their own race.

“The Nationals have a particular view of the agreement and the Liberals may have a different one,” she said.

“We’re focused on the seats where we are running candidates... I don’t see us running a candidate in Eildon.”

Asked if the Euroa contest would affect the coalition’s relationship, Ms Hammett said: “Victoria will be best served by a Coalition government and the Nationals are focused on seeing a coalition government returned.”