Speculation swirled in Pakistan on Sunday that a deal would be reached shortly enabling President Pervez Musharraf to resign without fear of prosecution, avoiding a divisive impeachment process.

Talk of resignation by former army chief and firm US ally Musharraf has been mounting since the coalition government, led by the party of assassinated former prime minister Benazir Bhutto, said last week it planned to impeach him.

Prolonged jockeying and uncertainty over Musharraf's position has already hurt Pakistan's financial markets and raised concern among the United States and other allies it is distracting from efforts to control violent militants in the nuclear-armed nation.

Saudi Arabian representatives were trying to broker a deal to protect and save face for Musharraf, a senior security official told Reuters.

"Some dignitaries have arrived here to mediate. A Saudi Royal Air Force plane is parked at Chaklala (air base) so the matter could be a day or two," said the official, who asked not to be identified.

Reports Saudi Arabia -- a key political and financial backer of fellow Muslim country Pakistan -- was mediating have been denied by both sides of the controversy.

Farhatullah Babar, spokesman for Asif Ali Zardari, Bhutto's widower and the leader of her party, said on Sunday: "Some foreign dignitaries might have arrived but we don't know and none of the foreign visitors contacted Mr Zardari."    

Asked about possible indemnity for Musharraf if he quits, Babar told Reuters: "Our position is very clear that it's up to the coalition and parliament to decide on the issue."    

The ruling coalition has prepared impeachment charges against Musharraf focusing on violation of the constitution and misconduct. There have also been reports it is looking into possible misuse of funds in Musharraf's foreign travels.

The nature of the charges has Musharraf's camp worried he might face prosecution even if he leaves office without a fight.

The president's spokesman has insisted Musharraf would not resign but would face the accusations. But coalition and other sources are adamant negotiations have been going on, adding that U.S. and British representatives have also been involved despite denials.

Western countries appreciate Musharraf's efforts to contain Islamic militants who have provided shelter for the Taliban and al Qaeda near Pakistan's border with Afghanistan.

The political uncertainty over Musharraf's fate has sapped investor confidence. Pakistani stocks are near two-year lows, while the Pakistan rupee has lost nearly a quarter of its value this year.

Pakistan also faces major fiscal problems, with Saudi Arabia's help critical to defer an estimated $5.9 billion worth of oil payments.

Musharraf, then a general and the army chief, seized power in a 1999 coup. His popularity began to evaporate last year when he clashed with the judiciary and imposed a stint of emergency rule to thwart opposition to his efforts to secure another term.

Musharraf's November 3 imposition of emergency rule is a main charge on the impeachment list, coalition officials say.

Foreign Minister Shah Mahmood Qureshi, from Bhutto's party, said on Saturday time was running out for the president to make a decision before the impeachment effort was set in motion.

"... if he resigns then there will be no need for the impeachment process," Qureshi told reporters.

Efforts to give immunity to Musharraf could face a roadblock from former prime minister Nawaz Sharif's Pakistan Muslim League (Nawaz), the main coalition partner of Bhutto's party. It was Sharif who was removed from power by Musharraf's coup.

As pressure has mounted on Musharraf, questions have been raised about the reaction of the politically powerful army. Analysts say it is loath to step into the fray but would not