A suicide bomber killed at least eight people and wounded 23 in an attack on police who had been guarding Islamists marking the anniversary of an army commando raid on Islamabad's Red Mosque.

The attack will raise questions about a new government's policy of trying to end militant violence through negotiations and increase concern about prospects for the country, a nuclear-armed U.S. ally making a transition to civilian rule.

President Pervez Musharraf, whose power has withered since his allies were defeated in a February election and who has been facing calls to step down, said on Friday more radical mosques would emerge if extremism and militancy were not tackled.

The former army chief ruled out resigning, saying he was needed to help politicians avoid an economic meltdown and tackle the militant threat.

The blast happened several hundred metres (yards) from the city-centre mosque, shortly after a tightly guarded meeting of Islamists there had ended.

Worshippers could be seen streaming out of the mosque after the explosion. Sirens were heard across the city as ambulances raced towards the scene on what had been a quiet evening.

There were conflicting casualty figures with several senior policemen and city officials saying more than 10 people had been killed. A security official said 12 people had been killed, all but one or two policemen.

But the Interior Ministry said eight people had been killed and 23 wounded.

"Police were going back to their stations when it happened," said senior police official Kamran Adil.

"The primary target was our men."

Body parts, pools of blood and police equipment littered the road and nearby walls were pocked by shrapnel.

The government's top Interior Ministry official, Rehman Malik, told reporters the bomb had been caused by a suicide bomber and police had found the upper part of his body.

The attack is likely to add to worry among stock investors, whose confidence has been undermined by political squabbling, insecurity and economic problems, including inflation running at more than 20 percent.

Stocks have been sliding and the rupee set a new low against the dollar last week.

"JIHAD"

Earlier on Sunday, several thousand Islamists listened to fiery speeches at a protest meeting at the mosque to mark the first anniversary of the army raid on the complex.

More than 100 people were killed when commandos stormed the Red Mosque complex, which included a madrasa or Islamic seminary, on July 10 last year, after a week-long siege that began when gunmen from the mosque clashed with police outside.

Speakers told the crowd, most of them men, that Musharraf was to blame for the bloodshed last year.

"Pervez Musharraf, you thought you could crush the Islamic movement by attacking the Lal Masjid (Red Mosque), but we are telling you, you have failed," Shah Abdul Aziz, a cleric and former member of the parliament, told the crowd.

"It was done at the behest of America and Bush. But I want to tell America jihad will continue, it will never stop," he said as protesters shouted "al jihad", or holy war.

The mosque's hardline clerics and supporters waged a violent campaign to enforce Taliban-style rule, kidnapping women they accused of prostitution and some policemen, and storming music and video shops and beauty parlours.

They also accumulated weapons and battled security forces for days after the siege began, rejecting calls to surrender.

The assault unleashed a wave of suicide attacks across the country in which hundreds of people were killed, including former prime minister Benazir Bhutto.

Baitullah Mehsud, a Pakistani Taliban leader based in an ethnic Pashtun tribal region on the Afghan border who has links with al Qaeda and banned sectarian militants, has been blamed for most of the attacks.

The new ruling coalition, led by Bhutto's party, has been trying to negotiate peace with him through tribal leaders, although U.S. commanders in Afghanistan say pacts lead to more attacks there.

Despite the peace efforts, security forces launched a sweep on June 28 against militants from another faction in Khyber region who had trying to impose Taliban ways in the nearby northwestern city of Peshawar.

Security around the mosque was tight on Sunday with police blocking roads and frisking many bearded Islamists passing through metal detectors.

"The killers of innocent male and female students do not deserve any mercy," read a banner strung up outside the mosque.

Speakers warned the government against any crackdown on religious schools and said any attempt would be met with force.