Let me clarify the instability I'm referring to. I don't mean that a system of more than two parties causes chaotic policies in the country (actually, I'd bet against that). I mean that a system of more than two parties has a natural tendency to transform into a two-party system.

I agree. The best examples of third parties are the modern British Liberal party, and the insurgent Republican Party of 1860. But we can see that there were/are very strong regional factors in play, and that it never found a stable or quasi-stable situation where there were an obviously better menu of candidate choices.