Benazir Bhutto has been released from house arrest in Pakistan, reports say.
Bhutto now says she is unwilling to share power with Gen Musharraf
The opposition leader was placed under a seven-day detention order on Tuesday in Lahore, where she had been planning a mass protest march.
Police said the order had been lifted - but there are reportedly still dozens of officers outside her residence.
A new prime minister, Mohammedmian Soomro, has been sworn to act as the head of an interim government until parliamentary elections next year.
President Pervez Musharraf says the move, which follows the dissolving of parliament at the end of its five-year term on Thursday, marks a transition to democracy.
But General Musharraf's critics say he has demonstrated no commitment to democracy in the past.
Opposition leaders say the interim government is not neutral and will rig the elections.
"The government has withdrawn Bhutto's detention order, and from now, she is free to move wherever she likes," Aftab Cheema, police chief of the eastern city of Lahore, told the news agency Reuters.
"Police will remain [outside] for her security, but there will be no restriction on her movement," he added.
On Thursday Ms Bhutto reportedly told Dawn TV she had conclusively ruled out the possibility of sharing power with Gen Musharraf, whom she accuses of taking Pakistan back towards military dictatorship.
"Too much water has gone under the bridge," she said.
"We have said very clearly that we cannot keep doors open when commitments are broken."
Tensions rose when the first reported deaths of the crisis came amid pro-Bhutto protests in Karachi on Thursday.
Two boys, said to be aged around 11 or 12, and an adult died when gunfire broke out during a demonstration against Ms Bhutto's detention, police said.
Several other people were reportedly wounded.
John Negroponte, the US deputy secretary of state, is due to arrive in Pakistan on Friday.
The US says it is waiting to see how events unfold in the days to come.
As protests continued in Karachi, the first deaths of the crisis came
Washington has refused to distance itself from Gen Musharraf, a long-time ally, though correspondents say it is making increasingly urgent demands that emergency powers he imposed on 3 November be lifted.
Pakistan's National Assembly dissolved at midnight after its five-year term came to an end.
Mr Soomro, a member of Gen Musharraf's ruling Pakistan Muslim League Q party, has taken over as prime minister from Shaukat Aziz, who is leaving office after three years.
Gen Musharraf confirmed the appointment at a dinner on Thursday, at which he wore a black suit instead of his military uniform, reported AFP news agency.
"We are introducing a new culture of smooth transition which is as it should be in civilised societies. The assemblies are completing their five-year term in a better way than before," Mr Musharraf was quoted as saying.
The appointment came as the Supreme Court heard a challenge to emergency rule imposed earlier this month.
The court is also due to rule on whether Gen Musharraf's re-election as president last month was legal.
Correspondents say he is expected to win both cases after changing the make-up of the court when he declared the emergency on 3 November, sacking several judges who had shown judicial independence.