Pakistan coalition may-split post-Musharraf: analysts

ISLAMABAD (Reuters) - Deadlock between Pakistan's coalition partners over the restoration of deposed judges has raised questions about the survival of the government that forced President Pervez Musharraf's resignation.

Musharraf, the former army chief and key ally of the United States in its campaign against terrorism, resigned as president of nuclear-armed Pakistan on Monday to avoid impeachment by the coalition government.

But the two main coalition partners, the party of assassinated former prime minister Benazir Bhutto and that of another former prime minister, Nawaz Sharif, are unnatural allies.

Bitter rivals during the 1990s, when Bhutto and Sharif alternated as prime minister, the parties were thrown together by their opposition to Musharraf. His departure could undermine the logic of their alliance, analysts said.

"The glue that was holding the coalition partners together was Mr Musharraf. Now that punching bag has gone," said Rashid Rehman, a former newspaper editor and analyst.

"Going by yesterday's deliberations, alarm has been raised," Rehman said, referring to a long meeting on Tuesday in which the two main parties failed to break their deadlock over the judges Musharraf fired last year.

"The only thing that's a surprise is how quickly it has happened after Musharraf left. They've hardly had time to savor their victory," Rehman said.

Investors are watching nervously.

The crisis over Musharraf had already hurt financial markets in the country of 165 million people, and raised concern in Washington it distracted from efforts to tackle militants.

Musharraf's resignation lifted shares and the rupee on Monday and again on Tuesday but stocks ended 3.6 percent lower on Wednesday as investors began to lose hope for an end to tension.

The rupee, which has lost over a fifth of its value against the dollar this year, also weakened, ending at 74.80/90.

ARMY NEUTRAL

Sharif, who heads the second biggest party in the coalition, has been insisting the judges be restored to office.

But Bhutto's party is dragging its feet because the deposed chief justice might take up challenges to an amnesty from graft charges granted to party leaders last year, analysts say.

"My optimism is fading very quickly," said Rasul Bakhsh Rais, professor at the Lahore University of Management Sciences. "The coalition may not continue if the judges are not restored."

The departure of Sharif's party from the coalition would not force an election. Bhutto's People's Party, the biggest in parliament, should be able to gather enough support to remain in government.

With Sharif winning much popular support for his tough stand on the unpopular Musharraf and the judges, an election is the last thing Bhutto's party wants, he said.

"If elections are held, I don't think the People's Party can survive. It will be wiped out," Rais said.

Two smaller coalition partners are trying to end the impasse over the judges and leaders are due to meet again on Friday.

Sharif's party has raised the possibility of pulling out.

"If they don't settle it then we could review our strategy and relations with the government ... all options will be open," Sharif party vice president Zafar Iqbal Jhagra told Reuters.

Analysts ruled out any imminent intervention by the army, whose image was damaged by Musharraf's unpopularity.

"The army wants to be neutral now, they want to be out of politics and I don't see them playing a role in the near future," said Umbreen Javaid, head of the politics department at Punjab University.

But if the economic and political situation deteriorated, military intervention could not be ruled out.

"They're not coming back tomorrow, but if the situation gets worse and you begin to hear a public clamor for something to be done because the coalition government is in paralysis and the country is spiraling downwards, then all bets are off," said Rehman.

(Additional reporting by Kamran Haider; Editing by Jerry Norton)