LAHORE, Pakistan, (Reuters) – Pakistan freed opposition leader Benazir Bhutto from house arrest shortly before a top U.S. diplomat began a visit on Friday aimed at persuading President Pervez Musharraf to end emergency rule.

U.S. Deputy Secretary of State John Negroponte was due to meet Musharraf on Saturday, and was expected to push him to roll back the emergency invoked two weeks ago, release thousands of detainees and hold “free and fair” elections.

In an interview with Reuters hours after her release, Bhutto said the U.S. envoy should take a firm line with Musharraf, who took control of the nuclear-armed, militant-threatened country in a coup eight years ago. “What’s important is what Mr. Negroponte says to General Musharraf, to our armed forces; what he says if he meets political parties,” said Bhutto, who had been placed under house arrest in Lahore on Tuesday to stop her leading a protest rally. “The agenda should be democratisation of Pakistan,” she said, although she was non-committal on whether she would be meeting or speaking with Negroponte, who last week described Musharraf as an “indispensable” ally.

Most opposition leaders were in custody, along with lawyers, opposition and rights activists.

In the capital, Musharraf swore in an ally as caretaker prime minister — Senate Chairman Mohammadmian Soomro — and a 24-member cabinet packed with Musharraf loyalists to oversee an election due by Jan. 9 after the National Assembly completed its five-year term on Thursday.

The opposition says there is no chance of elections being fair in these circumstances. As well as lifting the emergency, Bhutto is insisting on an independent election commissioner and installation of a caretaker government acceptable to all parties. She plans to discuss with other opposition leaders on Nov. 21 whether to boycott the election.

The outgoing prime minister, Shaukat Aziz, was widely credited with transforming Pakistan from a country on the brink of bankruptcy eight years ago to one of the fastest growing economies in the world. There are considerable doubts about his position in the next government.

The uncertainties are weighing on financial markets. Stocks closed only marginally down on Friday, but the main index was near a two-month low, and has lost 5.5 percent since the emergency was imposed. It is still up 31 percent this year.

The United States had hoped army chief Musharraf and Bhutto would share power after the election but Bhutto, infuriated by the crackdown, has ruled that out. “I can’t see how I can team up with somebody who raises hopes and dashes them, who makes commitments and moves the goal posts. He talked to me about a roadmap to democracy and imposed martial law,” Bhutto told a news conference earlier. She also told Britain’s Sky News that Negroponte should warn Musharraf that U.S. aid could be stopped.

Washington has given Pakistan an estimated $10 billion of financial support since 2001, the bulk of it for the military. In declaring the emergency, Musharraf suspended the constitution, fired judges seen as hostile, rounded up thousands of opponents and rights activists and curbed the media.

The country’s most high-profile rights activist, Asma Jahangir, was freed from house arrest and met Bhutto on Friday.

Small protests have erupted across the country and been broken up by police with sticks, but two boys were killed in shooting during a protest by Bhutto supporters on Thursday.

Washington fears the turmoil will distract attention from the fight against militants supporting the Taliban in Afghanistan.

The Pakistani army has stepped up efforts to clear militants from one such area, the Swat Valley in North West Frontier Province, where it says it has killed dozens of rebels in recent days.

Musharraf says he will quit as army chief and take the oath as civilian president as soon as the Supreme Court, where judges seen as friendly to the government have been appointed, dismisses challenges against his re-election last month. The attorney general said that should happen by the end of the month.

Many Pakistanis seem disillusioned with all leaders. “We’ve tried everyone, they’re all the same,” said Islamabad bank worker Yousuf Ali.