Pakistani opposition leader Benazir Bhutto is expected to seal a "reconciliation agreement" with President Pervez Musharraf on Friday that analysts believe could lead to power sharing within months.

Although on the verge of gaining an ally, Musharraf was uncertain if a presidential election will go ahead in parliament and provincial assemblies on Saturday, as the Supreme Court is hearing new challenges to him standing while army chief.

The court is expected to rule on Friday whether to order the postponement of a vote that General Musharraf, who came to power in a coup eight years ago, looks sure to win.

The fate of Musharraf, a staunch U.S. ally, and nuclear-armed Pakistan is being closely watched, especially by Western nations who have troops in Afghanistan and feel threatened by al Qaeda militants hiding on the Pakistani-Afghan border.

The reconciliation agreement will erase corruption charges against Bhutto and other civilian leaders, paving the way for her return on October 18 from more than eight years of self-exile to lead her party in a general election due by mid-January.

A senior official of her Pakistan People's Party (PPP) said Bhutto, 54, had approved a final draft of the pact late on Thursday.

"Benazir Bhutto has accepted the draft but that does not mean a conclusive agreement has been reached," Senator Farooq Naik told Dawn Television.

Final agreement hinged on the government formally promulgating the pact in the form of a presidential ordinance, he said. That was expected later on Friday.

The ordinance is designed to address a key Bhutto demand by removing the threat of prosecution against her and other former politicians and government officials.

"It is an across-the-board bill for all political parties,"

Bhutto, who denies longstanding corruption charges against her in connection with her two terms as prime minister, told reports in London earlier.

"We expect there will be no obstacle in the path of my return," she said.

"A ROLE TO PLAY"

Musharraf's coalition is expected to fare badly because of anger over rising prices, mounting insecurity and resentment over military rule and an alliance with the United States.

The United States has quietly encouraged Musharraf and Bhutto to work together to stop Pakistan falling into the thrall of religious conservatives and prey to militants.

Asked about the talks with Bhutto, Musharraf said the country needed reconciliation to deal with the biggest challenge it faced -- terrorism and extremism.

"In the process of national reconciliation, the People's Party and she have a role to play," he told Dawn Television.

Asked if Bhutto could be an ally, he said: "Possibly."

He did not rule out the return after the elections of Nawaz Sharif, the prime minister he ousted in 1999 and later exiled.

Analysts were in no doubt the proposed reconciliation accord was a precursor to post-election power sharing with Bhutto.

"Of course, it depends on the elections and whether the election is fair and free and whether BB wins, but obviously the agreement on this means that they will cooperate with each other," said Shafqat Mehmood, a former minister turned political analyst, referring to Bhutto by her initials.

Musharraf has gone a long way to meeting another of Bhutto's conditions by saying he would quit as army chief by November 15.

But she also wants presidential powers to dismiss a prime minister clipped, having seen both her governments in the late-1980s and mid-1990s fall that way.

"The balance of power between president and parliament has still not been resolved," said Bhutto, adding that would be addressed in a "stage two" of negotiations.

Another Bhutto demand -- the lifting of a ban on two-time prime ministers, such as herself, serving a third term -- will require a constitutional amendment.

Bhutto said earlier if her terms were met, her PPP wouldn't join other opposition parties seeking to undermine the credibility of the presidential election by quitting parliament.

PPP assembly members would abstain or vote for their candidate. An opposition alliance headed by Sharif's party will boycott the presidential election.

Pakistan's main stock index has gained nearly 6 percent this week, largely on hope that Musharraf, who has overseen strong growth and booming stocks, will be re-elected.