U-turn staves off threat to Pakistan coalition government

The move by the Muttahida Qaumi Movement (MQM) came after the government backed down on unpopular economic measures.

But the government's concessions could prevent it from receiving billions of dollars in international loans, exacerbating the country's precarious financial position.

Prime Minister Prime Minister Yousuf Raza Gilani said the government would reverse unpopular fuel price hikes that partly prompted the party's defection.

He also said during a visit to MQM headquarters in the southern port city of Karachi that the government would postpone a new tax system meant to raise more revenue.

"Our unity will benefit both the country and the national interest," said Gilani, while standing next to senior MQM leader Raza Haroon. "We can steer the country out of this storm."

Haroon said the MQM agreed to rejoin the coalition for the sake of democracy and the country's well-being.

But the party's demands that the government reduce fuel prices and hold off on tax reform will deepen the country's deficit, a development that could lead the International Monetary Fund to withhold billions of dollars in loans desperately needed to stabilise the economy.

IMF spokeswoman Caroline Atkinson criticised the fuel price decision, saying Pakistan needed to reduce the amount of money it is spending on energy subsidies.

"They're inefficient and untargeted so that the bulk...of the benefit from the energy subsidy goes to higher-income individuals and large companies," Ms Atkinson said. US Secretary of State Hillary Clinton also criticised the decision.

The US has pledged billions of dollars in civilian aid to bolster Pakistan's economy, but Mrs Clinton has said repeatedly that the country must reform its tax system to increase the amount of revenue it is generating domestically.

Political analyst Mosharraf Zaidi said the ruling Pakistan People's Party may have survived this crisis, but it had been severely weakened.