ISLAMABAD (Reuters) - Pakistan's President Pervez Musharraf is ready to resign rather than face impeachment but is seeking immunity from prosecution for imposing emergency rule, a coalition government official said on Friday.

Speculation has been mounting that former army chief Musharraf would quit since the ruling government coalition, led by the party of assassinated former prime minister Benazir Bhutto, said last week it planned to impeach him.

A spokesman for the president has repeatedly denied media reports that he was about to quit, and he did so again on Friday.
But a coalition official said negotiations on the terms of the unpopular president's resignation were going on.
"He is ready to resign but he is putting conditions like indemnity for the November 3 action," said the official, who declined to be identified, referring to Musharraf's imposition of a six-week stint of emergency rule last year.

"Back-door talks are still going on. Things have not yet been finalised. Let's see what happens," said the official, who has knowledge of the talks.

The long-running crisis surrounding Musharraf's future has heightened concern in the United States and among other allies about the stability of the nuclear-armed Muslim state, which is in the front line of the campaign against militancy.

Uncertainty over his fate is unnerving investors, with the rupee setting a new low for the fourth session on Friday at about 75.70 to the dollar. Stocks are hovering near two-year lows.

Uncertainty over his fate has been unnerving investors, with the rupee weakening on Friday to another record low against the dollar, at about 76.30/40, for the fourth straight session.
But stocks, which have been hovering near two-year lows, rose 3.6 percent as investors cheered Musharraf's possible departure as a milestone that would ease political tension.
Musharraf seized power in a 1999 coup but has been isolated since his allies lost a February election.

In Washington, White House spokeswoman Dana Perino referred to reports of Musharraf's resignation plan as a "rumour mill", adding that the United States considered the leadership of Pakistan an issue for Pakistanis.

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Musharraf's spokesman, retired Major-General Rashid Qureshi, said reports of a resignation plan were "baseless and malicious" and he knew nothing about any talks.
But Tariq Azeem Khan, a politician close to Musharraf and a former deputy government minister, said talks were going on.
"Well-wishers are trying to ensure that matters are settled amicably through discussions rather than going through a long, protracted impeachment process," he said.

(Additional reporting by Tabassum Zakaria in Washington)