(Adds details, fresh quotes)

By Simon Cameron-Moore

ISLAMABAD, Nov 17 (Reuters) - U.S. envoy John Negroponte met President Pervez Musharraf on Saturday to press him to revoke emergency rule and make peace with opposition leader Benazir Bhutto.

Fearful of undermining a crucial ally at a time when al Qaeda has regrouped in Pakistan's tribal lands, Deputy Secretary of State Negroponte was expected to try to revive a deal between Bhutto and Musharraf, that fell apart after he imposed the emergency on Nov.3.

The United States wants General Musharraf to free thousands of lawyers, opposition and rights activists and end emergency rule as a pre-requisite for a free and fair general election expected some time before Jan 9.

But U.S. officials also fear that anyone replacing Musharraf will be unable to deliver as much support in the U.S.-led war against terrorism, their Pakistani counterparts say.

"The Americans are nervous about not having Musharraf in charge of Pakistan," an official in the Pakistani presidency said. "They were told that the situation is very, very fluid."

Negroponte, who plans to hold a news conference on Sunday morning, had separate meetings with General Ashfaq Parvez Kayani, who will take over as army chief when Musharraf quits; Lieutenant General Nadeem Taj, the Inter-Services Intelligence (ISI) chief; and Khursheed Mehmood Kasuri, foreign minister in the government that ended its five year term on Thursday.

Musharraf, who came to power in a 1999 coup, has said he expects to step down as army chief and be sworn in as a civilian president before the election.

On Friday, Musharraf swore in a caretaker government, made up of people seen as friendly to his allies in the Pakistan Muslim League (PML), after the National Assembly was dissolved a day earlier.

Depending on how the elections go, the increasingly unpopular Musharraf could end up with power but limited support, unless he is backed by Bhutto's Pakistan People's Party (PPP).

BOYCOTT POSSIBLE

The United States had earlier helped broker an understanding for them to share power following an election -- but both sides accuse the other of betraying trust.

Soon after arriving in Islamabad, Negroponte spoke by telephone to Bhutto in the eastern city of Lahore, where she was released after being held for three days under house arrest to stop her leading an anti-Musharraf protest.

"General Musharraf should retire as army chief," Bhutto told journalists on Saturday before she caught a flight back to her hometown Karachi, where she hopes to consult other opposition leaders on Nov. 21 on a possible election boycott.

Bhutto fears Musharraf will not let her PPP get a clear run, and wants the Election Commissioner replaced and the caretaker government disbanded and replaced with a mutually agreed figures to oversee the run-up to polls.

Musharraf is angry with the way he has been portrayed by foreign and Pakistani media since invoking the emergency, and has retaliated by placing curbs on television news coverage.

On Saturday, he persuaded Dubai to block broadcasts by two critical Pakistani news channels -- Geo News and ARY One World -- via satellite from the Gulf Emirate.

The turmoil has heightened concern about potential instability in nuclear-armed Pakistan, and fears that the army could become distracted from battling militancy.

In a BBC interview broadcast on Saturday, Musharraf sought to ally worry that Pakistan's nuclear weapons could fall into "the wrong hands".

"The military is there -- as long as the military is there, nothing happens to the strategic assets, we are in charge and nobody does anything with them," he said.

Pakistan's army told journalists on Saturday it planned to launch a major operation involving 15,000 troops to clear hundreds of militants out of the Swat Valley in North West Frontier Province. (Additional reporting by Sheree Sardar and Robert Birsel in Islamabad, and Faisal Aziz in Karachi)

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