ISLAMABAD (AFP) - Pakistan agreed to grant former prime minister Benazir Bhutto an amnesty on corruption charges Tuesday as President Pervez Musharraf named a new army chief just days before he seeks re-election.

The day of dramatic developments came as military strongman Musharraf, a key US ally who seized power in 1999, faced growing opposition to his plan to win another five-year term in Saturday's presidential vote.

The move to drop a raft of graft charges against Bhutto, who has vowed to return to Pakistan on October 18, satisfied one of her key demands for a power-sharing deal with the embattled Musharraf.

"The government has agreed to grant an indemnity on cases against Benazir Bhutto," Railways Minister Sheikh Rashid, a close confidant of Musharraf, told AFP.

"The decision was taken in a meeting chaired by Prime Minister Shaukat Aziz."

Bhutto, who served as premier between 1988 and 1990 and again from 1993 to 1996, has lived in self-imposed exile in London and Dubai since 1999 because of the charges pending against her.

Top government officials said the move would be formalised by Musharraf in a presidential order granting amnesty to politicians facing cases that dated from 1985 to 1999 "as part of his national reconciliation drive".

But they said the amnesty would not cover another ex-premier, Nawaz Sharif, the man whom Musharraf ousted in a coup. Sharif was deported within hours of his return to Pakistan last month when he tried to return from exile.

Bhutto has held months of power-sharing talks with Musharraf but they stuck on issues including her demand for an amnesty.

They also disagreed on whether Musharraf should give up his role as army chief and on her stipulation that the government overturn a bar on people serving a third time as prime minister.

Earlier in the day, Musharraf showed his commitment to an earlier promise to quit the military if he wins the election by naming the former head of Pakistan's top spy agency to succeed him as chief of army staff.

Lieutenant General Ashfaq Kiyani is the former head of the shadowy Inter-Services Intelligence, or ISI, which is tasked with hunting down Al-Qaeda operatives and maintaining internal security.

"General Kiyani is widely respected as a thorough professional," top military spokesman Major General Waheed Arshad told AFP, confirming Kiyani's appointment.

Kiyani led Musharraf's side in talks with Bhutto in London and the United Arab Emirates earlier this year.

The military said Kiyani would take up the position on Monday, indicating that the president could hang up his uniform either the same day or on Tuesday, shortly after Saturday's vote.

The political turmoil surrounding the election intensified Tuesday as 85 opposition MPs resigned in protest at Musharraf's candidacy.

Musharraf has promised to step down by November 15 if he wins the presidential ballot in the national and federal parliaments, where his allies hold a large majority.

Lawmakers from the anti-Musharraf All Parties Democracy Movement handed their resignations to the parliamentary speaker on Tuesday in a mass bid to wreck the credibility of the election.

Two female lawmakers from the ruling party also quit, state media said.

"This is a historic day. The presidential election holds no constitutional legitimacy now," parliamentary opposition leader and hardline Islamist Maulana Fazlur Rehman told reporters.

The alliance parties of Sharif and cricketer-turned politician Imran Khan, plus a clutch of fundamentalist groups. Bhutto's Pakistan People's Party is not part of the coalition.

The Supreme Court earlier said that it would hear on Wednesday legal appeals lodged by the two candidates standing against Musharraf in the presidential election.

Former Supreme Court judge Wajihuddin Ahmad, who quit rather than swear allegiance to Musharraf after his 1999 coup, and Bhutto party vice chairman Makhdoom Amin Fahim both both called for the vote to be halted.

Musharraf won a major victory in the Supreme Court on Friday when it threw out opposition challenges and ruled that he was eligible to stand in the vote.

But it was followed the next day by a police crackdown on protesters in Islamabad that left dozens of lawyers and journalists needing hospital treatment.