Aug. 20 (Bloomberg) -- Pakistan's ruling coalition, fresh from ending a six-month standoff by forcing President Pervez Musharraf to resign, failed to resolve a festering dispute over reinstating judges he fired.

The alliance may split if the judges aren't reinstated, said Chaudhry Nisar Ali Khan, leader of a faction of the Pakistan Muslim League that is the coalition's second-biggest member, in an interview with GEO television.

The government's inability to reach a compromise will continue to distract the four-party alliance as Pakistan suffers from faster inflation, a slowing economy and rising militancy on its border with Afghanistan. That may cause problems for U.S. President George W. Bush, who considered Musharraf an ally in fighting al-Qaeda and the Taliban and is pressing the new government to step up its efforts.

``If I were the Bush administration, I'd kiss goodbye the chance of having a workable Pakistani government'' this year, said Daniel Markey, a senior fellow at the Council on Foreign Relations in Washington. ``For the next weeks and probably months, the focus will remain on the rules of the game, and who holds power.''

After two days of meetings on what to do about the judges, the coalition said yesterday it hoped to find a solution in the next 72 hours, according to Fazl-ur-Rahman, chief of the Jamiat- e-Ulema Islam, a coalition partner. Asif Ali Zardari's Pakistan Peoples Party leads the coalition with the Muslim League faction of former Prime Minister Nawaz Sharif.

Stocks, Rupee Fall

Zardari wants Sharif's party to support legislation that would give indemnity to Musharraf before reinstating judges, GEO reported today, without saying where it got the information. Sharif, who has called for Musharraf to be tried, has refused to support the proposed law, it said.

Pakistan's stocks and currency fell today on concern that the deadlock will keep policy makers from focusing on the cooling economy, which is growing at the slowest clip since 2003.

The Karachi Stock Exchange 100 index fell 3.6 percent to 10,525.98, the biggest decline since Aug. 6, and is down 25 percent this year. The rupee weakened 0.5 percent to 74.875 a dollar, according to data compiled by Bloomberg. It touched a record low of 76.50 on Aug. 15.

Moody's Investors Service said today that Pakistan's debt rating may be cut because of its deteriorating foreign exchange reserves and worsening growth outlook. Moody's lowered the rating to B2 in May, five notches below investment grade.

`Semblance of Stability'

Musharraf, 65, quit Aug. 18 to avoid facing impeachment over charges he illegally toppled Sharif in a 1999 coup and violated the constitution when he fired the 60 judges in November. Zardari's stalling in reinstating the judges prompted Sharif to withdraw his ministers from the cabinet in May, though the former premier said he would remain in the alliance.

``It is critical the judges are reinstated so that the system doesn't collapse and there is some semblance of stability,'' said Ayesha Siddiqa, an Islamabad-based political analyst and author of ``Military Inc.''

Mohammedmian Soomro, chairman of the Senate and a Musharraf loyalist, was named acting president pending a parliamentary vote to choose a new head of state within 30 days.

Charging Musharraf

In an opinion poll released by Gallup Pakistan yesterday, 65 percent of Pakistanis favored charging Musharraf with misconduct and violating the constitution, while 72 percent want him punished. In a survey of 560 men and women in urban areas, 63 percent said they were happy about Musharraf's resignation, according to the survey, which had an error margin of 5 percent.

Sharif and Zardari's wife, Benazir Bhutto, who was killed at an election rally in December, were bitter rivals before the two parties united against Musharraf, alternating power twice each between 1988 and 1999. The former general fired the judges, including Supreme Court Chief Justice Iftikhar Muhammed Chaudhry, before a judicial panel was about to rule on the legality of his re-election as president.

Musharraf assumed the presidency in 2001 and was re-elected by parliament in October. Opposition parties claimed the law barred Musharraf from seeking to remain president while he still headed the military. Musharraf handed over control of the army to Ashfaq Parvez Kayani in November.

Party Differences

While the two parties pledged to reinstate the judges in a March 9 agreement that formed the basis for the coalition, the leaders differ on how to achieve this.

Sharif wants the judges restored through a parliamentary resolution that sends the present judiciary back home. Zardari prefers reinstatement that also retains the current judges appointed by Musharraf on Nov. 3.

``The reinstatement of judges is as important as the leaving of Musharraf was,'' Sharif, 58, told GEO. ``Mr. Zardari had committed to us that the judges would be reinstated immediately after Musharraf is gone. It should not be delayed further.''

The Supreme Court Musharraf appointed in November backed legislation he issued that withdrew decade-old corruption charges against Bhutto and Zardari, as part of an agreement that saw them return from exile.

Zardari has repeatedly denied the corruption charges and says the law that withdrew charges against him isn't the reason he opposes reversing Musharraf's November reshuffle of the bench.

Musharraf's departure marks a victory for Zardari, 52, and Sharif, who pledged on Aug. 7 to remove the president. The government, which came to power in March after defeating pro- Musharraf parties in Feb. 18 elections.

The judges should now be immediately reinstated, Aitzaz Ahsan, president of the Supreme Court Bar Association, told reporters two days ago. Lawyers had led nationwide protests for more than a year, calling for Musharraf to resign.

To contact the reporter on this story: Khalid Qayum in Islamabad at kqayum@bloomberg.net; Robin Stringer in New York at rstringer@bloomberg.net.

Last Updated: August 20, 2008 13:30 EDT