Pakistani President Pervez Musharraf has yet to decide whether to step down as army chief, a spokesman said on Thursday, as former Prime Minister Nawaz Sharif announced he would return home from exile on September 10.

Sharif told a news conference in London he would fly back to Islamabad and travel by road to Lahore, his power base and Pakistan's political nerve centre, before mounting a challenge to Musharraf at elections.

We will be launching a movement against Mr. Musharraf and his government, said Sharif who faces the possibility of arrest on his return.

With his term coming to an end and his popularity plummeting, U.S. ally Musharraf is trying to shore up his position before his attempt to secure another presidential term.

He has turned to self-exiled former prime minister Benazir Bhutto for help and his aides have been discussing a power-sharing deal with the two-time prime minister in London.

Bhutto has insisted an agreement would hinge on Musharraf stepping down as chief of the army, which has ruled for more than half Pakistan's history since independence in 1947.

She said on Wednesday she had almost sealed a deal that would see Musharraf quit as army chief, possibly before he seeks re-election next month. But the president's spokesman, Rashid Qureshi, said no final agreement had been reached.

A kind of impression is being given that a decision has been done but no such thing has happened so far. Not to my knowledge, Qureshi said. Dialogue is continuing.

Musharraf aims to get re-elected president for another five years between mid-September and mid-October before his term as army chief expires at the end of the year. A parliamentary election is due around the turn of the year.

Western governments are closely following the turbulence in Pakistan, a nuclear-armed state whose support is critical to fighting al Qaeda and defeating the Taliban in Afghanistan.

LAUNCHING A MOVEMENT

The Supreme Court last week added to pressure on Musharraf to agree terms with Bhutto by ruling that Sharif, the prime minister Musharraf overthrew in 1999, could return home.

After the 1999 coup, Sharif was convicted of graft and given a life sentence on a hijacking charge related to his refusal to allow landing rights to an airliner carrying Musharraf back from Sri Lanka, despite it being short of fuel.

The government said Sharif was allowed to go into exile in 2000 after agreeing to stay out of the country for 10 years. But he denied any such agreement and early this month petitioned the Supreme Court to clear the way for his return.

Sharif's stand against Musharraf has raised his standing among the public, some of whom have questioned Bhutto's motives for negotiating with the president.

Bhutto, who has also vowed to return for the elections, would expect to become prime minister again under a deal with Musharraf although that would require a constitutional amendment to remove a bar on prime ministers serving more than two terms.

Bhutto, who has corruption charges hanging over her, also wants immunity for civilian officials who served in the late 1980s and 1990s. She also wants the president stripped of powers to dismiss governments.

Bhutto is due to meet her party leaders in London on Friday and wants terms finalized then. Qureshi dismissed reports Musharraf was facing an ultimatum from Bhutto.

Pakistan's main stock index, which has been hurt by political worry in recent weeks, ended 1.16 percent up on hope for an agreement between Musharraf and Bhutto, dealers said.

(Additional reporting by Luke Baker in London and Faisal Aziz in Karachi)

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