Since the start of the year the rupee has fallen 12.7 percent against the dollar, and optimism surrounding an election in February that brought the country's two main moderate parties together in a coalition has all but evaporated.

Critics fear divisions within the month-old coalition over how to reinstate judges dismissed by President Pervez Musharraf during a brief period of emergency rule last November, have diverted Prime Minister Yousaf Raza Gilani's government from addressing pressing economic problems.

"We need greater leadership on the ground," said a currency trader, who requested anonymity because of the sensitivity of the subject in a market closely shepherded by the central bank.

There has been speculation that the alliance could collapse, though party leaders have asserted their unity.

Amid these worries, rupee closed at 69.40/60 on Friday, compared with Thursday's close of 67.08/20.

The central bank has been intervening to curb volatility, but its reserves are dwindling.

"When the State Bank reserves are less than $10 billion, how much can they possibly intervene," said a treasury head of a local bank.

Reserves held by the State Bank of Pakistan fell to $9.926 billion in the week ended on May 3 from $10.367 billion a week earlier, while those held by commercial banks rose marginally.

One senior banker said earlier this week the rupee could recover if Pakistan managed to secure funding from multi-lateral lenders and friendly governments.

Inherited debacle

Soon after taking office Finance Minister Ishaq Dar spoke of the dire state of the economy taken over from the caretaker government and the previous government led by Musharraf's allies.

Inflation is running at a 13-year high, while the new coalition has inherited burgeoning trade and fiscal deficits.

Yet, Musharraf had insisted the economy was a success story.

Pakistan was on the brink of bankruptcy when he came to power as a general in a coup in 1999, but it turned into one of the region's fastest growing economies after Musharraf became a U.S. ally in the war on terror in 2001 and billions of dollars of financial support flowed in.

This funding, however, delayed much needed economic reforms and the rupee's fall was overdue, according to some analysts.

"The impact of dollar increase is going to be good for exports and, of course bad, for imports. So it is better for the domestic industry," Zubair Khan, a former commerce minister, said. "But, of course, it has an inflationary impact," he added.

Economic growth is seen slowing to 6 percent in the year ending June 30, after averaging at 7 percent in the past four years.

The Pakistani stock market has long appeared immune to poor economic data, but sentiment turned just over two weeks ago.

The Karachi Stock Exchange (KSE) index hit a three-month low on Thursday, though it inched up on Friday to end the morning session at 14,433.99 points.

Money changers selling foreign currency to ordinary people said their supplies were running dry.

"There is very little supply of dollars now," said one Karachi-based money changer. "People have been coming and buying dollars as if they're for free."