Zimbabwe, gripped by rampant hyper-inflation stoked by ruinous economic policies, reacted by knocking ten zeros off the country’s near-valueless currency.

The move by the Reserve Bank, which analysts said would do nothing to redress the economic crisis, turned ten billion dollars in to one dollar. It came as President Mugabe went on state television and threatened to impose a state of emergency if businesses took advantage of the country’s economic woes, which he blames on the limited sanctions imposed by the West.

Mr Mugabe, 84, often accuses Western capitalists for the country’s plight, but this time his words, coinciding with a breakdown in talks with the opposition in neighbouring South Africa on a government of national unity, were taken more seriously.

An African diplomatic source close to the talks, which began at a secret location in Pretoria last week, said: “If he feels the talks are not going his way, he could well use the economy as an excuse for a state of emergency and try and cling on a little longer."

President Mbeki of South African flew to Harare yesterday to see Mr Mugabe after having previously met Morgan Tsvangirai, the leader of the main opposition Movement for Democratic Change (MDC). He later said that the talks would resume on Sunday.

It is believed they stalled after Mr Mugabe offered the MDC leader only a few minor ministries and the meaningless position of third deputy president — a new post. The MDC claims that it won the first round of the country’s election on March 29, but then Mr Mugabe unleashed a campaign of intimidation to win a second round which the opposition boycotted.

Mr Mugabe would remain as president for two years and then step down, but the opposition fears the ruling ZANU (PF) party would use the period to undermine the MDC still further and ensure one of its top politburo figures takes over.

In his television statement, Mr Mugabe insisted that he was negotiating in good faith. “We are still negotiating, we want to succeed...You find room for compromise but sometimes compromise is difficult ... So things are never easy.” An official South African statement said that Mr Mbeki would also meet the leader of a breakaway opposition faction, Arthur Mutambara.

Mr Mugabe and Mr Tsvangirai, who is also under pressure from his grassroots not to make too many concessions, met for the first time in ten years last week and agreed to have their negotiators hammer out a formula to share power.

All sides are under immense regional pressure to do a deal. Zimbabwe’s neighbours, all awash with hundreds of thousands of refugees, have lost patience with Harare, but remain deeply suspicious of the MDC and its leader.

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