ISLAMABAD - Pakistani President Pervez Musharraf's opponents won a big election victory on Tuesday as voters rejected his former ruling party, raising doubts whether the U.S. ally who has ruled since 1999 can keep power.

Nawaz Sharif, the prime minister Musharraf overthrew in a coup and only allowed back from exile three months ago, urged Musharraf to accept he was no longer wanted.

"He would say when people would want, I will go. Today the people have said what they want," Sharif said after his party ran a close second in Monday's polls.

A wave of sympathy helped the Pakistan People's Party of assassinated former Prime Minister Benazir Bhutto emerge as the largest party in the 342 seat National Assembly.

But it does not have a majority and will need to seek coalition partners.

Bhutto's assassination in a suicide attack on December 27 heightened concern about the stability of the nuclear-armed Muslim state, where al Qaeda leaders have taken refuge.

Musharraf, who emerged as a crucial U.S. ally in a "war on terror" most Pakistanis think is Washington's, not theirs, has seen his popularity plummet in the last year as he reeled from one political crisis to another.

Groups of happy opposition supporters celebrated in the streets in cities across the country as results rolled out showing pro-Musharraf politicians losing.

While Pakistanis hoped for a new era, many remained unconvinced by the reappearance of politicians associated with corrupt, inefficient governments from the 1990s.

"The promises that have been made by Nawaz Sharif and People's Party should now be fulfilled and they should do something for the country and not for themselves," said Mohammed Arif, sitting in his pharmacy in Karachi.

DISTANT THIRD

The pro-Musharraf Pakistan Muslim League trailed a distant third, and the party's spokesman conceded defeat after the voters' verdict but kept alive chances of joining a coalition.

"They have rejected our policies and we have accepted their verdict," PML's Tariq Azim Khan told Reuters.

"For the best interest of the country, we're willing to cooperate and work with anybody."

While it was not a presidential election, a hostile parliament could try to remove Musharraf.

Sharif said he planned to meet Bhutto's widower, Asif Ali Zardari, who took over the helm of the PPP, on Thursday.

"I am looking forward to working with all democratic forces," he said.

"I invite all to sit together and free Pakistan of dictatorship, sit together to say goodbye to dictatorship forever."

Some analysts said differences between the PPP and Sharif's party made a coalition doubtful.

Counting was continuing with results still awaited in less than 20 seats, but no party could win a majority.

As of 6 p.m., unofficial results for 252 seats showed Bhutto's Pakistan People's Party (PPP) had won 86 and Sharif's Pakistan Muslim League (Nawaz) had 65.

The pro-Musharraf PML trailed with 37. Small parties and independents shared the others.

A few seats weren't contested, while 70 reserved for women and religious minorities will be divided up proportionately among parties according to the number of votes they won.

Musharraf has said he would accept the results and work with whoever won to build democracy in a country that has alternated between civilian and army rule throughout its 60-year history.

Increasingly isolated, Musharraf allowed Bhutto to return from eight years in self-exile in October, and, pressured by Saudi King Abdullah, he let Sharif come back a month later, though he was barred from standing in the election.

DECISIVE FACTOR

Bhutto's slaying intensified anti-Musharraf sentiment, with few people accepting the government's assertion she was killed by al Qaeda-linked militants, and her death resulted in the vote being postponed from January 8.

Other reasons for PML's defeat were Musharraf's unpopularity and anger over inflation, food shortages and power cuts.

Sharif's party found favor for its demands judges dismissed last November, when Musharraf imposed a brief spell of emergency rule, should be reinstated to decide whether he could keep the presidency.

Relief at the absence of serious rigging relatively low levels of violence helped Pakistan's main stock market gain more than 3 percent, despite the prospect of further upheavals.

At least 20 people were killed, but that was not as bad as feared after a bloody campaign.

An election watchdog group put turnout at 35 percent.

A secular ethnic Pashtun nationalist party was winning in North West Frontier Province. Islamist parties that won in 2002 were soundly trounced as moderate forces re-established their influence on Pakistan's most militant-prone region.

Additional reporting by Zeeshan Haider, Faisal Aziz and Sahar Ahmed in Karachi; Writing by Simon Cameron-Moore; Editing by Alex Richardson and Jerry Norton

© 2008 Reuters