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Pakistani stocks at new 2-yr low on coalition split

KARACHI - Pakistani stocks fell over 4 percent on Tuesday to a new two-year low as investors sold blue chips such as OGDC on fears a break-up in the coalition government would raise political uncertainty.

The second largest party in the coalition announced late on Monday it was pulling out.

The benchmark Karachi Stock Exchange index ended down 3.9 percent at 9,430.29 points, the sharpest one-day fall since July 28, after falling as much as 4.38 percent. Tuesday's decline took the market to a level last seen on Aug. 28, 2006.

Investors said although the coalition's break-up eliminated uncertainty about how the fractious alliance will work together, the split raised concerns on how outstanding political issues will be resolved, including the election of the next president.

Some investors said the persistent political uncertainty will deter foreign investors from putting their money in Pakistan for months to come.

"It will take at least three to six months for the new government to build up its image in the eyes of foreign investors and the United States," said Mohammed Sohail, director of equity broking at JS Global Capital.

Former Pakistani prime minister Nawaz Sharif pulled his party out of the coalition over disputes about the judiciary and a September presidential vote, deepening a political crisis that has diverted government attention from pressing security and economic problems.

The Pakistani stock market, which rose for six straight years from 2002, and was one of the top performers in Asia during that period, has tumbled 33 percent this year on political tension and a weak economy.

Pakistan is struggling with soaring inflation, falling reserves, and widening trade and fiscal deficits.

As of Monday's close, Pakistan's stock market was the third worst-performing in Asia after China and Vietnam.

Political uncertainty also caused the Pakistani rupee to slightly weaken to hover near a record low against the dollar on Tuesday.

Traders said foreign investors led share selling on Tuesday.

State-owned Oil and Gas Development Co (OGDC), Pakistan's biggest firm by stock market value, fell 5 percent.

MCB Bank, Pakistan's largest bank by stock market value, was down 5 percent, and state-run Pakistan Petroleum fell 4 percent.

"The run up to the elections will keep political uncertainty high and markets volatile," said Imtiaz Gadar, an analyst at JPMorgan.

"However, we do expect more clarity on this front following presidential elections, once it is established which party will lead in the power game," he said.

The election of the next president has been a divisive issue among political leaders.

Pakistan People's Party (PPP), which has the most seats in parliament, has chosen Asif Ali Zardari, widower of assassinated former prime minister Benazir Bhutto, as its candidate.

But Sharif said that violated an earlier agreement with the PPP for a non-partisan candidate if the presidency retained certain powers, including to dismiss parliament.

Asad Iqbal, managing director at Ismail Iqbal Securities, said political tension in Pakistan may ease if Zardari wins the presidency as that meant the president and the prime minister would be from the same party.