A spokesman for the cleric Muhammad Tahir-ul-Qadri said a 10-member delegation was holding discussions to defuse a political crisis that erupted after he led a convoy of buses carrying thousands of protesters into the capital on Monday.
Qadri, who supported a 1999 military coup, is calling for the immediate resignation of the government and the installation of a caretaker administration in the run-up to elections due in the next few months.
Hours before the meeting began, Qadri issued what he called a final warning to the government as supporters listened to his latest speech during heavy rain in the heart of the capital, where some have set up large tents.
"Now I give an ultimatum that the president and his team must come for dialogue in one and a half hours and it's the last peaceful offer to them," said Qadri, who returned home from Canada a few weeks ago and became a media sensation with calls for a new political landscape.
"Today is the last day of our sit-in. Tomorrow, we will act with a new strategy."
He did not elaborate.
Although Qadri kept up the pressure, Pakistan's government felt some relief after the chief of the state's anti-corruption agency rejected a Supreme Court order to arrest the prime minister.
Qadri's appearance at the forefront of Pakistan's political scene has fuelled speculation that the army, with its long history of involvement in politics, has tacitly endorsed his campaign in order to pile more pressure on a government it sees as inept and corrupt.
Qadri and the military deny this.
Nevertheless, his appeal has cast fresh uncertainty over the government's effort to become Pakistan's first civilian administration to complete a full term.
Qadri had many followers who back his religious charity which has offices in 80 countries around the world.
The military has ruled Pakistan for more than half of its 65 years since independence. Current army chief General Ashfaq Kayani has vowed to keep the military out of politics.
Qadri has repeatedly demanded that the army should have a say in the formation of an interim administration.
On Tuesday, the Supreme Court ordered the arrest of Prime Minister Raja Pervez Ashraf in connection with alleged kickbacks in transactions involving rental power plants when he served as power minister.
Fasih Bokhari, head of the National Accountability Bureau, told the Supreme Court that investigations of the allegations against Ashraf were incomplete.
The court asked Bokhari to produce case records so that it could decide whether there is enough evidence to prosecute the prime minister and other officials accused in the case.
But fresh troubles may be brewing for the government, which has been heavily criticised for its failure to strengthen the economy, fight militancy and eradicate poverty.
The Supreme Court has admitted a petition filed against Sherry Rehman, Islamabad's ambassador to the United States and a well-known member of the ruling Pakistan People's Party, accusing her of committing blasphemy.
Court documents show that the police have been directed to investigate the allegations. Rehman has faced death threats from militants for calling for reforms of Pakistan's anti-blasphemy law, which has been condemned by human rights groups.
(Additional reporting by Katharine Houreld; Writing by Michael Georgy; Editing by Ron Popeski)
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