BENAZIR BHUTTO last night revealed she was close to a deal to back Pakistan’s embattled military ruler General Pervez Musharraf if he lifts the ban on her serving a third term as prime minister and drops criminal charges against her.

The exiled opposition leader said Musharraf had struck a “confidential agreement” on stepping down as army chief, and had accepted her return in principle but was still blocking it ahead of the elections expected later this year. She said she hoped to return by October to lead her party’s election campaign.

Her confirmation that she is poised to cut a deal with the beleaguered general came as Britain and the United States warned Musharraf they would abandon him if he does not give way to an elected prime minister.

The warning was made by Condoleezza Rice, the American secretary of state, and senior western diplomats in a flurry of overnight phone calls last week that forced Musharraf to ditch plans to impose a state of emergency.

Rice’s intervention was made at 2am on Thursday morning, just hours before the emergency was due to be announced, and reflected growing American and European frustration with Musharraf’s rule, despite his role as a crucial ally in the war on terror.

Britain and America believe the emergency plan was aimed at postponing parliamentary elections and allowing Musharraf to continue as both army chief and president without a legal challenge. They feared it would jeopardise their efforts to speed the return of Bhutto and Nawaz Sharif, another exiled former prime minister.

The general quickly abandoned his plan, and his government later released a statement confirming his commitment to elections, but the damage had been done. Senior diplomats said Britain and America now regard Musharraf as an accident-prone incompetent who created the crisis engulfing him.

Lieutenant-General Talat Masood, former head of Pakistan’s ISI intelligence service, said: “The Americans now realise he [Musharraf] is more of a problem than a solution.”

Diplomats believe Musharraf’s indecision and failure to end the siege by Islamic militants at Islamabad’s Red Mosque quickly led to the prolonged stand-off that eventually left more than 100 dead when troops stormed the compound last month. The raid sparked a series of suicide bombings throughout the country.

Rice is believed to have told Musharraf that imposing an emergency would be a political disaster which would be resisted by Pakistan’s newly assertive judiciary, media and opposition.

A recent opinion poll revealed Bhutto to be the country’s most popular politician, and that most Pakistanis were against Musharraf remaining as president. According to the poll, his only hope of survival was through a deal with Bhutto, which 47% said they would support.

The biggest threat to his presidency remains Iftikhar Chaudhry, the chief justice he tried to sack, who is now expected to rule on a series of petitions challenging Musharraf’s plans to save his presidency.

Diplomats believe the immediate trigger for Musharraf's emergency plans was the first of these challenges, the petition by Sharif to be allowed to return to Pakistan and fight the elections.

Early indications suggesting that Sharif will win his case have caused panic among Musharraf’s close circle of military intelligence advisers. The government lost another battle last week, when the Supreme Court backed a petition from Bhutto demanding that the country's electoral lists be redrafted to include an estimated 30m "lost" voters.

Britain and America now believe the return of Bhutto and Sharif is crucial if Pakistan is to have a chance of stability, and they no longer believe Musharraf is the only leader they can rely on in the war on terror.

Times Recommends

• Cairo women fight back against harassment
• Weapons-grade flirting for Hillary and David
• More at stake in Start talks than US and Russia