Musharraf flays rumor mongers for sowing strife

By Simon Cameron-Moore

ISLAMABAD (Reuters) - Pakistani President Pervez Musharraf has lashed out at rumor-mongers for speculation he planned to quit to avoid being forced out by the new government, and for trying to cause a rift between him and the army.

"The rumor-mongers wish to create differences between me and the army," Musharraf said at a banquet on Thursday night.

Speculation U.S. ally Musharraf might resign has circulated since an election in February brought to power a coalition that would like to see him leave office, and the latest rumors sparked concern among investors.

A story in "The News" newspaper Thursday of a late-night meeting between Musharraf and Gen. Ashfaq Kayani, who replaced him as army chief in November, said the president had decided to quit.

Musharraf strongly rebutted the story.

"It was a routine meeting and we discussed issues. We have the best of association. There is no problem whatsoever," said Musharraf, who went on to list how many times he had met Kayani recently, and said they would have dinner together Sunday.

Earlier Thursday the military issued a statement saying Kayani "regretted that a section of press is trying to unnecessarily sensationalize routine functional matters."

On Friday, U.S. President George W. Bush phoned Musharraf and offered renewed support for Pakistan.

"The president reiterated the United States' strong support for Pakistan and he indicated he looked forward to President Musharraf's continuing role in further strengthening U.S.-Pakistani relations," White House spokeswoman Dana Perino told reporters.

The United States and other Western allies have been closely involved in Pakistan's political transition toward democracy, and there are fears instability in the nuclear armed Muslim state will ultimately benefit Islamist militants.

INVESTOR UNCERTAINTY

The uncertainty has unsettled investors already worried by how the new government will bring spiraling fiscal and trade deficits under control.

Buying by state-run institutions reversed a 4.5 percent drop in the Karachi share index Thursday, but the index ended 22 percent off its April 21 peak, and 13 percent below where it started the year.

The bearishness was evident in early trade Friday, as the index dropped 1.7 percent in the first 35 minutes of trading.

Regarding relations with the government, Musharraf also struck a moderate tone although the party leading the coalition wants at the very least to reduce his role to ceremonial, and the second-largest party wants him impeached and tried for imposing emergency rule for a few weeks in late 2007.