According to the media, a decision to drop corruption charges against Bhutto, currently in London, and pave the way for a power-sharing deal, was made during a late-night meeting attended by the country's president, prime minister and government representatives.
Bhutto speaking from London said she was "optimistic" about the deal with Pervez Musharraf, who said he will resign as Armed Forces chief next month and launch a national reconciliation policy if re-elected president.
The document, which will grant a full amnesty to Bhutto, who has occupied the premiership twice before being forced to flee in 1999, will be examined by Cabinet ministers before being sent to the president for official approval.
Earlier the PPP, the most influential party in Pakistan, threatened to boycott the presidential elections if their demands were not met.
Musharraf who has been confronted by recent widespread rioting by hard-line Islamists, and faced dwindling support both at home and in the U.S., had reportedly been in talks with Bhutto to try and ensure re-election in the upcoming elections.
The deal would also give an amnesty to all political leaders who occupied office between 1988 and 1999, including ex-premier Nawaz Sharif, deported from Pakistan in September.
Bhutto, 54, is the daughter of deposed Premier Zulfikar Ali Bhutto, the founder of the PPP. He served as the president of Pakistan between 1971 and 1973, and as prime minister between 1973 and 1977.
He was hanged in 1979 by the country's military ruler, General Muhammad Zia-ul-Haq, allegedly for sanctioning the assassination of a political opponent.
