General Pervez Musharraf stepped back from declaring a state of emergency in Pakistan today after 24 hours of political chaos in the country.

Frontpage headlines reported that the President, who suddenly cancelled a diplomatic visit to Afghanistan, was preparing to demand emergency powers that would delay parliamentary elections, place restrictions on the press and curtail the rights of the Supreme Court, the mainstay of opposition to his rule.

Pakistan's constitution allows the president to declare a state of emergency if the country is “threatened by war or external aggression, or by internal disturbance" that is beyond the control of local authorities.

General Musharraf was reported to be about to announce the move after weeks of terrorist attacks in retaliation for the bloody end to the siege of the Red Mosque in Islamabad in July, when government troops stormed a religious school and mosque where Islamist fighters and zealots were holding out. Declaring emergency law was also interpreted as an authoritarian step to control popular opposition to his Government.

The rumours set off a collapse of the stock market in Karachi, which fell 4 per cent this morning, and immediate protests from rival politicians, including Benazir Bhutto, the former Prime Minister who was reported to have agreed a power-sharing deal with General Musharraf last month. The Supreme Court was also expected to challenge the legality of the move.

There was confusion abroad. In Kabul, President Hamid Karzai was forced to put on a show of Afghan-Pakistani unity at a meeting of the loyal "jirga" — 600 tribal leaders from the two countries — without his absent counterpart, who he said was held up by "engagements in the capital". The Pakistani Prime Minister, Shaukat Aziz, came in General Musharraf's place.

The US Secretary of State, Condoleezza Rice spoke to General Musharraf, a key ally in the Bush Administration's war on terror, for 15 minutes by telephone. A British Foreign Office spokesman said: "We are aware of conflicting reports and are trying to find out what is going on."

The dramatic reaction — one political analyst described a state of emergency as a weapon of "mass political destruction" — prompted ministers and political allies of the President to say that he had decided against the measure this afternoon.

The Information Minister, Mohammed Ali Durrani, said he had spoken to the President and that he was committed to holding free elections later this year. “He is of the opinion in the present circumstances that there is no justification for imposition of emergency," he said.

Chaudhry Shujaat Hussain, the president of ruling Pakistan Muslim League, told reporters at parliament: “There is no possibility of an emergency."

Aides to General Musharraf said that declaring a state of emergency was one of several options that have been considered in crisis talks this week.

The President, who came to power in a military coup in 1999, is experiencing the worst crisis of his rule after a spate of terrorist attacks and a prolonged battle with the Supreme Court, which recently reinstated its chief justice — whom General Musharraf tried to remove — and ordered the release of an opposition leader who had been imprisoned for the last three years.

The court is also expected to use the constitution to challenge General Musharraf's attempt to run for a third term in office while remaining in charge of the armed forces this autumn. By coincidence, it also heard a petition today from Nawaz Sharif, the Prime Minister ousted by General Musharraf in 1999, who wants to return from exile to run in the parliamentary elections later this year.

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