President Bush seems to have decided — and rightly so — that truly “free and fair elections” are the best way to maintain crisis-plagued Pakistan as a stable ally in the war on terrorism. [IMGCAP(1)]

That’s what Bush said last week in a press conference, and the administration backed it up with a phone call from Secretary of State Condoleezza Rice to Pakistani President Pervez Musharraf warning him off a plan to stay in power by declaring a state of emergency.

The administration apparently is encouraging a deal between Musharraf and Harvard- educated former Prime Minister Benazir Bhutto that would allow Musharraf, America’s problematical ally in the war on terror, to remain president if he allows free elections, which polls indicate Bhutto would win.

The administration evidently thinks the two are making progress toward power-sharing — they met face-to-face last month in Dubai — but sources close to Bhutto tell me that isn’t so.

They say Musharraf is not fulfilling promises he made to give up his military uniform, allow Bhutto back into the country and set the stage for fair elections. Also, his deteriorating political standing is likely to stiffen Bhutto’s demands, complicating a deal.

Everything about Pakistan’s political and military situation is perilous. In fact, next to Iraq, it probably is the most dangerous place in the world. It is home to al-Qaida and the Taliban and faces a rising Islamist movement that has allies in the military and the powerful intelligence services.

It also is nuclear-armed, meaning an Islamist coup could produce the nightmare situation that the world thinks is still years away as Iran works on nuclear weapons.

Musharraf, who took over in a military coup in 1999, became America’s staunch ally in the war on terror in 2001, helping make it possible to oust the Taliban and al-Qaida from neighboring Afghanistan.

Terrorists have tried to assassinate him on several occasions. Jihadists took over a major mosque in central Islamabad until they were violently evicted last month, triggering terror bombings around the country.

And a deal Musharraf worked out to control the Taliban in the lawless tribal areas of his country failed to accomplish its purpose, increasing infiltration into Afghanistan. Recently, he has sent the army back to fight terrorists, with uncertain results.

Despite a healthy economy, Musharraf has become deeply unpopular — partly because of his alliance with the United States and partly for suppressing democratic opposition, often ruthlessly. Islamic fundamentalism has emerged as the only available avenue for protest.

Musharraf made moves to keep himself in power by planning to rig elections, insisting on retaining his position as a general and attempting to depose the chief justice of Pakistan’s Supreme Court who declared his efforts unconstitutional.

The justice was restored to office after street demonstrations led by lawyers that Musharraf’s government tried to suppress, sometimes violently.

Last week, Musharraf aides floated a trial balloon about the possibility of a declaration of national emergency, which would have postponed elections and permitted a crackdown on civil liberties. The Pakistani press and public reacted with outrage.

The Bush administration has been confronted with a dramatic choice over the past several months — stick with Musharraf as he struggled to stay in power or encourage him to allow a democratic opening.

The evidence, from public statements and recent actions, is that Bush has decided to try for a delicate compromise, keeping Musharraf on as president and also encouraging democracy. It could be a decent outcome — if it works.

The administration has a mixed opinion of Bhutto, who was twice elected prime minister — in 1988 and 1993 — and twice deposed, the last time amid charges of corruption against her and her husband.

On the positive side, Bhutto has made strong statements in support of the war on terror and praised Musharraf’s raid on Islamabad’s Red Mosque to evict jihadists. In an interview this spring, Bhutto told me she would be more helpful to the U.S. in Afghanistan and in controlling tribal territories than Musharraf has been.

Recent polling by the U.S. International Republican Institute indicates that Bhutto’s Pakistan People’s Party, in alliance with another democratic opposition party, would defeat Musharraf’s party, 50 percent to 24 percent. Musharraf’s approval rating is 34 percent, and 62 percent of voters insisted that he should resign from the army to remain president.

Sources close to Bhutto say her terms for allowing Musharraf to retain the presidency include his agreeing to leave the army, seeing to it that old legal charges against her are dropped so she can return to the country, eliminating a constitutional bar to anyone’s serving more than twice as prime minister, dropping his plan to be re-elected president by the current parliament and eliminating the constitutional clause that enables a president to oust a prime minister.

The sources say Musharraf is not making moves to fulfill any of the demands. Meanwhile, he is losing power among the public and even among his military colleagues, raising questions whether it’s worth Bhutto’s while to make a deal.

The conventional American wisdom on Pakistan was demonstrated last week by Democratic Sens. Chris Dodd (Conn.) and Hillary Rodham Clinton (N.Y.) in the presidential candidate debate in Chicago.

Arguing against rival Sen. Barack Obama’s (D-Ill.) threat to unilaterally attack al-Qaida camps in Pakistan if Musharraf didn’t, Dodd said that “while Musharraf is no Thomas Jefferson, he may be the only thing that stands between us and having an Islamic fundamentalist state in that country.”

Clinton said, “I think it is a very big mistake to … destabilize the Musharraf regime, which is fighting for its life against the Islamic extremists who are in bed with al-Qaida and the Taliban.”

The fact is that Musharraf’s rule already is destabilized. Obama, to his credit, insisted that U.S. policy should be to encourage democracy in Pakistan as a stabilizing solution.

It’s a risky course. No one can be sure that a Bhutto government effectively could fight terrorism or win the confidence of the army and forestall a coup. On the other hand, Pakistan’s population wants democracy. U.S. policy needs to encourage it and Bush, to his credit, seems to be doing that.