(Adds court hearing on Sharif, stock market fall, background)

By Zeeshan Haider

ISLAMABAD, Aug 9 (Reuters) - Beleaguered Pakistan President Pervez Musharraf was due to convene a meeting with senior aides and ruling party leaders on Thursday to decide whether to declare a state of emergency, a senior member of the government said.

The government could justify the measure by citing mounting insecurity due to the threat posed by Islamist militants allied to the Taliban and al Qaeda after a spate of attacks, many of them by suicide bombers, over the past month.

General Musharraf is going through his toughest period since coming to power in a 1999 coup. Analysts and opposition leaders fear he might resort to an emergency because of constitutional difficulties he faces getting re-elected by the sitting assemblies while still army chief.

A member of the inner circle of the Pakistani leadership told Reuters that an emergency would almost certainly be imposed.

He said Musharraf, a staunch U.S. ally, had called for a meeting at 10 a.m. (0500 GMT) to determine what steps needed to be taken, though another member of the leadership said the government would want to take stock of the reaction to reports that an emergency could be declared.

A spokesman said nothing had been finalised.

"No decision has yet been taken, but all options are open to the government," Deputy Information Minister Tariq Azim Khan told Reuters.

Khan said the measure could be warranted by the deteriorating security situation in tribal areas and North West Frontier Province and suggestions by U.S. politicians that America should be prepared to strike inside Pakistani territory if it possessed actionable intelligence on al Qaeda or Taliban targets.

The United States has put Musharraf under pressure to act against al Qaeda nests in hostile tribal regions on the Afghan border.

Western countries with troops in Afghanistan are sensitive to any instability in nuclear-armed Pakistan, whose help is crucial to fighting the Taliban insurgency and in counter-terrorism operations against al Qaeda.

Musharraf cancelled plans to join Afghan President Hamid Karzai in Kabul on Thursday at a traditional council of Afghan and Pakistani leaders.

FOREBODING

Private news channels reported overnight that Musharraf would imminently announce the measure, which would probably delay elections due by the turn of the year and could result in restrictions on rights of assembly and place curbs on the media.

Pakistanis who went to bed too early to hear those reports awoke to newspapers warning them what to expect.

"Emergency looms on the horizon," was the banner headline in The News, the country's biggest-selling English language newspaper.

The Karachi stock market, which had shrugged off political uncertainties for weeks as it hovered near life highs, slumped by more than four percent within minutes of opening. Musharraf had planned to get re-elected in uniform between mid-September and mid-October before national and provincial assemblies are dissolved for parliamentary elections due in December or January.

Although Musharraf commands a simple majority needed to win re-election in the assemblies, he is likely to face multiple constitutional challenges.

The Supreme Court's momentous decision on July 20 to reinstate a chief justice, who Musharraf had spent four months trying to sack, has heightened expectations that those challenges could well be upheld.

A not-so-secret meeting in Abu Dhabi in late July with former prime minister Benazir Bhutto, leader of the largest opposition party, was indicative of how desperate Musharraf's position has become.

Bhutto, who lives in self-exile, has said "no deal" unless Musharraf quits the army, and guarantees free and fair elections.

The Supreme Court was due to hear a plea on Thursday for Nawaz Sharif, the prime minister Musharraf ousted eight years ago, to be allowed to return from exile.

Mohammad Abdullah, an Islamabad college student, spoke of the sense of foreboding spreading throughout Pakistan as he bought a newspaper, though the streets of the capital appeared normal, with no extra security evident.

"People already have a sense of insecurity and any such step would make them feel more unsafe and insecure," Abdullah said.

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