Pakistan was locked in crisis last night, with the government pressed by Washington to deepen its conflict with Islamic militants in the lawless regions on the Afghan border, and obliged to call in the International Monetary Fund to stave off financial catastrophe.

In the rugged north of the country, a major military offensive to root out Taliban militants has created a flood of up to 200,000 refugees and pitched Pakistani against Pakistani, Muslim against Muslim, in a conflict some are beginning to regard as a civil war.

A new US intelligence estimate meanwhile has warned that the renewed insurgency, coupled with energy shortages and political infighting, means that Pakistan, which is the only Muslim nation with nuclear weapons, is "on the edge".

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"Pakistan is going through the worst crisis of its history," according to a leaked letter signed by the former prime minister Nawaz Sharif, the main opposition leader. It is a view shared by Imran Khan, another opposition leader, who says that the political and economic meltdown "is leading to a sort of anarchy in Pakistan".

"How does a country collapse?" the former cricketer asked. "There's increasing uncertainty, economic meltdown, more people on the street, inflation rising between 25 and 30 per cent. Then there's the rupee falling."

Pakistan is experiencing power cuts that have led to hourly blackouts, a doubling of basic food prices and a currency that has lost a third of its value in the past year. "The awful thing is there's no solution in sight – neither in the war on terror nor on the economic side," Mr Khan said during a visit to London. Heightening the sense of national emergency, the government yesterday turned to the International Monetary Fund for $15bn (£9.3bn) to cope with a balance of payments crisis caused by a flight of capital, after previously saying that applying to the IMF would be a last resort.

Almost every day there are retaliatory attacks against police and soldiers and Western targets. Hundreds of soldiers and an unknown number of civilians are losing their lives. The national parliament rejected the US influence on the government by adopting a resolution last night calling for an "independent" foreign policy and urging dialogue with the extremists.

The military operation against the so-called Pakistan Taliban is concentrated in the largely autonomous tribal areas that border Afghanistan. A total of 120,000 troops and paramilitary forces have been deployed against what senior officers say is a skilled and tenacious enemy. "They do not fight in one place, you cannot fight them in one place. It's basically guerrilla warfare," said Lt Col Haider Baseer, a military spokesman. "The area is mountainous, it's vast. And everybody carries a gun. It's the culture."

Long accused of failing to confront the militants, the military angrily points out that up to 1,500 soldiers and many more civilians have been killed in such operations since 2001. America has triggered national anger by dispatching troops from Afghanistan to attack a Pakistani village. At the same time, Pakistani officials point out that US and Nato forces in Afghanistan are looking to negotiate with the Taliban – something they have previously criticised Islamabad for doing.

Mr Khan claimed that the US-led "war on terror" had led to "approximately one million" men taking up arms in the tribal areas. "The total al-Qa'ida who were supposed to be in Pakistan were 800 to 1,200 people. This is the biggest gift of George Bush to al-Qa'ida, what he's done there," said Mr Khan. "It's like a factory of terror, it's producing terrorists, radicalising our society, pushing those people who had nothing to do with al-Qa'ida or Taliban into the arms of militancy and opposing the Americans and the Pakistan army," he said.

Although Mr Khan leads the marginal Pakistan Tehrik-e-Insaf – which boycotted the last election – his views carry weight because of the strong moral stand he has taken in support of an independent judiciary and against endemic corruption, according to Pakistani analysts.

This week, perhaps partly to try to smooth relations, Richard Boucher, the US Assistant Secretary of State, praised the current military operation, which is said to have killed up to 1,000 militants. "I think it is good Pakistan is taking serious military action against the terrorists," he told reporters during a trip to the country, during which he met the recently elected President, Asif Ali Zardari. But Mr Zardari's coalition government is weak and the civilian president is accused by critics such as Mr Khan of being a "puppet" of the Americans, as was his predecessor, Pervez Musharraf.

Suicide bombs have become a near- daily occurrence. There have been more than 100 since July 2007, killing around 1,200 people. In 2006, there were just six such attacks. A report by the Pakistan's ISI intelligence agency suggested that in the first eight months of the year, more people were killed by suicide bombers in Pakistan than in Iraq or Afghanistan.

It remains unclear whether the army will continue to remain on the sidelines, as General Musharraf's successor as army chief-of-staff, General Ashfaq Pervez Kiyani, has pledged to do. But the army could act as a power broker from behind the scenes.

"I have never known as much uncertainty as this," said Mr Khan, who is based in Lahore and is visiting his children who live with his former wife, Jemima Khan. The security risks are now so grave for Pakistani politicians that for the first time, Mr Khan is considering wearing a bulletproof vest after receiving death threats.