Tahir-ul-Qadri made the announcement as the country's corruption watchdog told the Supreme Court it did not yet have enough evidence to arrest Prime Minister Raja Pervez Ashraf on graft allegations, as the top judge had ordered.
Tension in Pakistan has been at fever pitch since Tuesday, when the arrest order coincided with a fiery speech by Qadri denouncing politicians and praising the armed forces and judiciary.
The timing sparked panic about a rumoured judiciary-military plot to derail elections due by mid-May. The polls, if successful, would be the first democratic transition of power between two civilian governments in Pakistan's history.
The political crisis comes as Pakistan battles problems on numerous fronts: the economy is struggling, Taliban and other violence is at a high, the rupee is sinking, there is an appalling energy crisis and fledgling peace gains with India appear in jeopardy following five cross-border killings in a week.
Qadri on Thursday gave the government until 1000 GMT to negotiate on his demands for reforms, after which he said he would announce unspecified further action.
His announcement prompted cheering and dancing among his supporters, who have braved cold weather and heavy rain to camp out on Islamabad's main commercial avenue since early Tuesday.
"The situation does not allow me to put all the people, young people, children, women to further test. I give the government, I give the rulers a deadline of one and a half hours. This deadline will end at 3pm," Qadri said.
"Today is the last day of this sit-in. Tomorrow there will be no sit-in. We have to end it today," he added.
Ashraf chaired a meeting of coalition partners, several of whom have urged the government to start dialogue with Qadri. Deputy information minister Samsam Bukhari told private TV station Geo the government was open to talks.
Qadri wants parliament dissolved immediately and a caretaker government set up in consultation with the military and judiciary to implement reforms before free elections can be held.
The government has so far stuck to its position that parliament will disband in mid-March to make way for a caretaker government, set up in consultation with political parties, and elections within 60 days -- sometime by mid-May.
Qadri's sudden -- and apparently well-financed -- emergence after years in Canada has been criticised as a ploy by sections of the establishment, particularly the armed forces, to delay the elections and sow political chaos.
In the Supreme Court the chairman of the National Accountability Bureau, Fasih Bokhari, told Chief Justice Iftikhar Muhammad Chaudhry that investigations into a power projects graft case were not complete.
He said it took time to find evidence to prosecute those allegedly involved.
Chaudhry -- who on Tuesday ordered the prime minister's arrest -- ordered Bokhari to report back with the case files so that the court could itself point out evidence that could form the basis for a prosecution.
The court in March 2012 had ordered legal proceedings against Ashraf, who at the time was a close aide of President Asif Ali Zardari and was water and power minister when the power projects were set up.
While critics dismiss Qadri's supporters as a rent-a-crowd, many of his supporters articulate real concerns about Pakistan's problems, digging in for the long haul with supplies of food, water and mattresses and blankets.
"The government should find a solution... We are open for talks. This government has already completed its tenure, they should announce a date for elections and go," said protester Qaim Hussain from Karachi.