Pakistan's opposition election winners were due to step up efforts to forge a coalition on Friday, raising the prospect of a government intent on forcing U.S. ally President Pervez Musharraf from power.

Leaders of the two parties that won the election, the Pakistan People's Party (PPP) and the Pakistan Muslim League (Nawaz), or PML (N), vowed on Thursday to work together to form a new government but said they still had details to work out.

The main party that backs the unpopular Musharraf was dealt a stunning defeat in Monday's general elections leaving the president, who has been one of Washington's top Muslim allies against al Qaeda, vulnerable to a hostile parliament.

Nawaz Sharif, the prime minister Musharraf overthrew in 1999 and whose PML (N) came second in the vote, has demanded the unpopular president steps down.

But since the election, Musharraf has said he was not ready to resign.

U.S. President George W. Bush's administration has urged the next government to work with Musharraf and says Washington needs Pakistan - which borders Afghanistan where U.S. and NATO forces are fighting Islamist militants - as an ally.

Sharif met Asif Ali Zardari, Bhutto's widower and leader of her PPP since her murder on December 27, in Islamabad on Thursday evening for their first face-to-face talks since the election.

Sharif later told a news conference the two parties would work together to form a government. Zardari, whose party won the most seats in the election, said he wanted a broad government but one excluding the main party that backs Musharraf.

He said the PPP and Sharif's party would "stay together" but they had lots of details to work out.

"We have a lot of modalities to cover. We have a lot of ground to cover. Governance is a serious business and we can't cover all issues in a two-hour long meeting," he said.

"We will be meeting off and on. In principle, we have agreed to stay together," he said.

Zardari was due to meet his party's newly elected members for consultations in Islamabad on Friday.

SHARE MARKET SENTIMENT POSITIVE

Pakistani stocks fell in early trade as investors booked gains at higher levels ahead of the weekend following a 4.3 percent rise in the KSE-index since the peaceful elections.

However, dealers said sentiment was still positive and investors were looking forward to a new coalition.

The KSE-100 is the only share market in Asia to have gained this year, up 6.3 percent. Its gains over the past 12 months are ranked behind only China and Indonesia, though many investors still consider it a difficult and illiquid market.

The index set a life high at 15,034.31 on Thursday and has risen about 900 percent since 2000.

Analysts say the centre-left PPP and Sharif's centre-right Pakistan Muslim League (Nawaz) agree on little ideologically and some have doubted they could form a coalition.

But if they do team up, Musharraf could either quit or drag nuclear-armed Pakistan through more upheaval as parliament tries to oust him on grounds he violated the constitution when he imposed the emergency, they said.