President Musharraf has agreed to relinquish his role as chief of Pakistan’s Army as part of a power-sharing deal with his main political rival, Benazir Bhutto.

The embattled leader has also agreed to drop corruption charges against Ms Bhutto and dozens of MPs.

The deal paves the way for Ms Bhutto, the former Prime Minister, to return to Pakistan from exile in London and Dubai. Nawaz Sharif, another former exiled Prime Minister, has announced that he plans to return to Pakistan early next month.

Agreement was reached after several days of talks in London between General Musharraf’s envoys, led by Lieutenant-General Ashfaq Kiyani, the chief of Inter-Services Intelligence, and senior members of Ms Bhutto’s Pakistan People’s Party (PPP). Government sources said yesterday that General Musharraf would quit the Army before the end of the year. However, it was not clear whether he would do so before parliament is due to elect the new president, which could be as soon as mid-September. A formal announcement is expected this week.

Speaking in London, Ms Bhutto said: “We’re very pleased that General Musharraf has taken the decision to listen to the people of Pakistan by taking the decision to take off the uniform. I expect that he will step down [as army chief] before the presidential elections, but that is for the President to say.”

General Musharraf has announced his intention to seek election for a second five-year term, but Pakistani law bars him from holding both offices beyond November unless changes are made to the constitution. Yesterday the Supreme Court begain hearing a constitutional petition that challenges his candidacy.

General Musharraf’s reluctance to resign as head of the Army has remained a serious stumbling block in his quest to win Ms Bhutto’s support for his bid to remain president. Ms Bhutto wanted General Musharraf to seek election as a civilian. She told his aides that her party members would resign if he tried to get himself elected by the current parliament.

Ms Bhutto made a series of demands in return for backing the President, including the restoration of the constitution in the form that existed before the military takeover in 1999.

Pressure on General Musharraf to resign from the Army and even to leave politics altogether has been increasing since Mr Sharif announced his imminent return to Pakistan, ending his seven-year exile. The Supreme Court declared last week that Mr Sharif and his family could return home. He has ruled out any negotiations with General Musharraf.

Mr Sharif, who was Prime Minister from 1990 to 1993 and from 1997 to 1999, was sentenced to life in prison after he was overthrown by General Musharraf in October 1999. He and his family were sent into exile to Saudi Arabia after an agreement that – according to the Government – barred him from politics for ten years.

Observers said that General Musharraf’s power-sharing deal with the liberal and proWest PPP would not help to resolve the political crisis. Some analysts believed the agreement would cause further aggravation by excluding other political parties.