ISLAMABAD (Reuters) - Leaders of Pakistan’s coalition government on Tuesday set about seeking a replacement for President Pervez Musharraf and tackling pressing economic and security problems.

Musharraf, former army chief and key ally of the United States in its campaign against terrorism, resigned on Monday to avoid impeachment nearly nine years after taking power in a coup.

Speculation he would resign had mounted since the fractious coalition government, led by the party of assassinated former prime minister Benazir Bhutto, said this month it planned to impeach him on charges of violating the constitution.

Prolonged wrangling over Musharraf’s position hurt financial markets in the nuclear-armed country of 165 million people, and raised concern in Washington and elsewhere that it was distracting from efforts to tackle militants, especially in areas bordering Afghanistan.

Musharraf’s resignation lifted Pakistan shares on Monday to their biggest one-day rise in eight weeks, and helped the rupee recover slightly. But analysts said the rebound was temporary.

“It’s a major victory for the new government but there is still a lot of uncertainty going forward,” said Sayem Ali, an economist at Standard Chartered Bank.

Mushtaq Khan, a London-based analyst at Citi, said the government could now focus on the economy, taking concrete steps to restore investor confidence shattered by the political turmoil.

These include shrinking the trade deficit by banning imports of non-essential items such as luxury consumer goods, and cutting government spending by abolishing all fuel subsidies, Khan said.

QUESTIONS

Divisive questions still hang over Musharraf’s fate. There was no announcement on Monday on whether he would get immunity from prosecution and be allowed to live freely in Pakistan.

Coalition officials had said Musharraf sought immunity from prosecution, but he said in his resignation address to the nation he was asking for nothing.

“I leave my future in the hands of the nation and people,” he said.

One main coalition party, that of former prime minister Nawaz Sharif whom Musharraf ousted in 1999, has insisted he face trial for treason. Bhutto’s party says parliament should decide.

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With the coalition partners’ preoccupation with Musharraf out of the way, the United States and other allies will be keen to see the government focus on security.

Hundreds of people have been killed in a wave of suicide attacks in Pakistan in recent months and the U.S. Pentagon said in June insurgent havens in Pakistan were the biggest threat to Afghan security.

President George W. Bush said he appreciated Musharraf’s efforts to fight al Qaeda and other extremists, and was committed to a strong Pakistan that strengthened democracy and fought terrorism.

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Old rival India reacted cautiously to Musharraf’s resignation. Foreign Minister Pranab Mukherjee told reporters: “India will continue to have an amicable relation with Pakistan in the days to come”.

Pakistan is committed to a peace process with India launched under Musharraf, but India fears a weak civilian government will not have his influence over the army and military spy agency, which India suspects has a hand in most attacks on its soil.

The chairman of the Senate, Mohammadmian Soomro, will be acting president until a new one is elected within 30 days, but it is not clear who that will be. Traditionally, Pakistan’s president has been a figurehead, although under Musharraf the office was much more powerful.