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By Mike Collett-White

ISLAMABAD, July 31 (Reuters) - Ex-Premier Nawaz Sharif has given his clearest indication yet that he will not return to Pakistan to contest October elections, a senior member of his political party said on Wednesday.

Such a decision would rob the poll of a key player and make life easier for military ruler Pervez Musharraf.

Sharif is one of two former prime ministers in exile and facing possible arrest if they return home to contest a parliamentary election seen as meticulously orchestrated by arch-enemy General Musharraf.

"He (Sharif) will indicate to us, after consultation with party officials, the name of the party president," Raja Zafarul Haq, chairman of the Pakistan Muslim League (PML) of which Sharif is president, told Reuters.

"I think Sharif would not like to annoy his hosts Saudi Arabia (by leaving for Pakistan)," added Haq, himself a leading candidate to take over the position.

But Tehmina Daultana, a vice-president of the PML, insisted Sharif had yet to make up his mind.

Any decision not to return from Saudi Arabia would be seen as a major blow to his party, which is a member of Pakistan's main political alliance seeking to put an end to military rule.

Sharif was deposed by Musharraf in a bloodless coup in 1999 and, like fellow former prime minister Benazir Bhutto, is barred from the election for at least two reasons.

Both have convictions still outstanding against them and both have been prime minister twice, making them ineligible under a new Musharraf decree banning anyone from ruling for a third term.

"This (Sharif's decision) would be a setback for the PML and not good for the democratic process," said political analyst Anis Jilani. "The biggest loser would be Sharif himself and the biggest winner Musharraf."

Bhutto, who lives in London, says she will return to Pakistan to fight the election, despite police threats to arrest her as soon as she touches down.

Analysts are unsure whether she intends to go through with her promise, but believe that vowing to defy Musharraf's orders is a valuable vote winner in the run-up to the October 10 poll.

RISKS AND REWARDS

While return is risky, the Alliance for the Restoration of Democracy (ARD) of which Sharif's PML and Bhutto's Pakistan People's Party (PPP) are members, would receive massive boosts from the presence of well-known personalities, analysts said.

Bhutto is particularly popular in many areas, although she is unlikely to receive the same tumultuous welcome she did in 1986 when returning from her first exile to challenge another military ruler, General Zia-ul-Haq.

Her father was ousted as prime minister by Zia and hanged.

But in Sharif's case, his party says he has the extra complication of complying with his host country's wishes.

Ever since Musharraf sent him into 10 years' exile in Saudi Arabia in 2000, rumours have circulated that a deal was struck between the two governments.

"If there is an agreement between the governments of Pakistan and Saudi Arabia that he should not come back before the election, then he would honour that," Haq said.

As Musharraf tightens his grip on power, though, the outcome of the election has been dismissed in some quarters as all but academic.

He extended his tenure for five years in a referendum on April 30 that was boycotted by most mainstream parties.

Musharraf has also proposed a series of constitutional amendments which would allow him to sack the prime minister, dismiss the cabinet and dissolve an elected parliament. 

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