(Adds Musharraf quotes, changes byline)

By Zeeshan Haider

ISLAMABAD, Oct 3 (Reuters) - Pakistani President Pervez Musharraf's hope of a smooth re-election was threatened on Wednesday as ex-prime minister Benazir Bhutto said her party would probably quit parliament to rob the vote of credibility.

"I think that the resignation of the Pakistan Peoples Party MPs will be a severe blow to the legitimacy of the presidential elections," Bhutto said in London, where her party began a two-day meeting to discuss a strategy for Saturday's vote.

There is still no certainty the election will take place.

The Supreme Court began hearing on Wednesday a last-ditch bid by opponents to block Musharraf's almost certain victory on grounds that as a serving soldier he shouldn't be allowed to stand, even though he's promised to quit as army chief and be sworn in as a civilian president before Nov. 15.

The fate of U.S. ally Musharraf, and future of nuclear-armed Pakistan is being closely watched, especially by Western nations with troops in Afghanistan and threatened by al Qaeda militants hiding in tribal lands on the border between the two countries.

If the election goes ahead in parliament and the four provincial assemblies, Musharraf should easily beat two rivals thanks to the ruling coalition's parliamentary majority.

It will be a hollow victory, however, if Bhutto's party joins other opposition, led by her old rival Nawaz Sharif, by resigning from parliament.

Musharraf, who ousted and exiled Sharif in a 1999 coup, has been in negotiations with Bhutto for a possible post-election power sharing pact, but those talks had stalled, Bhutto said.

In an interview with Geo TV, a private news channel, Musharraf said discussions were still on.

"Dialogue is going on. No one is vetoing anything," Musharraf said, adding that he could even countenance some kind of reconciliation with Sharif, whose return from exile was blocked last month.

NEXT PARLIAMENT

Analysts reckon Musharraf will need support from somewhere if he's going to have any chance of lasting in power once he's quit the army -- his main source of support.

The parliament that emerges from a general election due by mid-January is expected to be less friendly to Musharraf, as many of his political allies stand to lose their seats.

Musharraf told Geo he may seek a vote of confidence from the new assemblies.

Bhutto, who plans to return to Pakistan on Oct. 18 after more than eight years of self exile, is playing hardball, however.

She said her party's lawmakers would "most probably" resign, due to Musharraf's refusal to "give a level playing-field".

Bhutto also described as "disinformation" a government announcement that it met one of her main demands by deciding to drop corruption charges against her and other civilian leaders.

On Tuesday, Musharraf nominated former intelligence chief Ashfaq Parvez Kayani as the next army commander in the clearest sign yet he would keep his vow to become a civilian leader, meeting one of Bhutto's main pre-conditions for any deal.

TRANSITION ROLE

Support for Musharraf crumbled after he tried and failed to sack the country's top judge in March.

There was already widespread grumbling over rising prices, and discontent over an alliance with the United States that has brought the army into conflict with its own people.

The United States, keen to see Pakistan maintain efforts to root out al Qaeda and curb Taliban raids into Afghanistan from its territory, has been quietly encouraging Musharraf and Bhutto to work together.

Pakistan's main stock index ended nearly 1 percent higher on Wednesday. It has put on more than 5 percent this week, largely on hope that Musharraf, who has overseen strong growth and booming stocks, will win re-election.

"I have a role to ensure a smooth transition," Musharraf told Geo. (Additional reporting by Mark Trevelyan in London)

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