Islamabad - The leaders of the two parties that came out on top in Pakistan's election meet on Thursday to discuss forming a coalition government that could force President Pervez Musharraf out of power.

    Musharraf, who took power in a 1999 military coup in the nuclear-armed country and has been one of Washington's top Muslim allies against al Qaeda, is vulnerable to a hostile parliament after his supporters were heavily defeated in Monday's election.

    Nawaz Sharif, the prime minister Musharraf overthrew more than eight years ago and whose party came second in the election, goes into the coalition talks having made clear he would like to drive the president from power.

    But in an interview with the Wall Street Journal published on Wednesday, Musharraf said he was not ready to resign. "We have to move forward in a way that we bring about a stable democratic government to Pakistan," he said.

    U.S. President George W. Bush's administration has urged the next government to work with Musharraf and says Washington needs Pakistan - which borders Afghanistan where U.S. and NATO-led forces are fighting Islamist militants - as an ally.

    "We've got interests in helping make sure there is no safe haven from which people can plot and plan attacks against the United States of America and Pakistan," Bush told reporters during a visit to Ghana.

    Musharraf's critics say his efforts to hold on to power have been a destabilizing factor in a country battling to stop attacks on its territory by al Qaeda and other militants. Neighbors and allies fear Pakistan is becoming more unstable.

    Pakistani shares, buoyed by the peaceful polls, put on more gains in early trade, rising to a life high of 14,972.56 points. The index has gained more than 4 percent since the elections and has recovered all the losses suffered after the assassination of former prime minister Benazir Bhutto on December 27.

    The KSE-100 is the only Asian share market to have gained this year, up more than 6 percent. It has risen about 900 percent since 2000 while its gains over the past 12 months are ranked behind only China and Indonesia. Many investors consider it a difficult and illiquid market, however.

    "Find Solutions"

    Bhutto's Pakistan People's Party (PPP) emerged as the main victor in the election and has begun coalition talks with Sharif's Pakistan Muslim League (Nawaz), also known as PML-N or the Nawaz League.

    "We are going to find solutions to the problems of Pakistan," Bhutto's widower Asif Ali Zardari, who took over as PPP leader after she was killed on December 27, said of his meeting with Sharif.

    "Parliament will decide which president it can work with and which president it cannot," Zardari told reporters.

    Since returning from exile in November, a month after Bhutto, Sharif has championed the reinstatement of judges Musharraf fired when he imposed six weeks of emergency rule on November 3.

    "There are no chances of showing any flexibility on the issue of judges' reinstatement," Sharif said on Wednesday.

    Musharraf sacked the judges, including Supreme Court Chief Justice Iftikhar Chaudhry, before they could rule on whether his re-election by the last parliament while he was army chief was legitimate under the constitution.

    Analysts say if the PPP and Sharif's party team up, Musharraf can either quit gracefully or drag Pakistan through more upheaval as parliament tries to oust him on grounds he violated the constitution when he imposed emergency rule.

    Analysts say Musharraf will be hoping Zardari and Sharif fail to agree on a coalition and that this could occur because of a history of enmity and mistrust between the centre-left PPP and the centre-right PML (N).

    Zardari was adamant Musharraf's main supporters, the Pakistan Muslim League (PML), would not be admitted to a PPP-led coalition, but gave the president a glimmer of hope by saying a junior partner in the last PML-led government was welcome.

    "I want to make a government along with MQM," Zardari told a news conference on Wednesday, referring to Muttahida Qaumi Movement, which represents Urdu speakers who migrated to Karachi when Pakistan was formed out of the partition of India.

    Musharraf belongs to that community and enjoyed some rapport with the MQM when it was in the government he presided over.

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    (Additional report by Sahar Ahmed; Editing by Robert Birsel and David Fox).

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