Such an arrangement could make life difficult for the government, which needs to take tough decisions to steer the country out of financial crisis facing a strong opposition bloc led by supporters of jailed former prime minister Imran Khan.

"It will be, of course, a roller coaster," said political commentator and author Ayesha Siddiqa of the road ahead for the next government.

The agreement between Bilawal Bhutto Zardari's PPP and the Pakistan Muslim League-Nawaz (PML-N) of three-time Premier Nawaz Sharif late Tuesday night ended days of uncertainty and negotiations after an inconclusive Feb. 8 election.

But the PPP is not taking cabinet positions, its secretary of information, Faisal Karim Kundi, told Reuters, and its support in parliament would depend on the party's stance.

"We will support policy decisions on an issue-to-issue basis," Kundi said, adding that PPP would vote for the PML-N's prime minister candidate, Shehbaz Sharif, younger brother of party chief Nawaz Sharif.

The most challenging task is to agree on critical fiscal tightening conditions under a new International Monetary Fund (IMF) programme.

The current IMF programme expires in March.

Other big moves include privatisation of loss-making state owned enterprises such as the flagship carrier Pakistan International Airlines (PIA).

Kundi said the PPP would not support the privatisation of the airline, while the PML-N would want to fast-track it.

In return for supporting the formation of government by PML-N, PPP will seek the offices of president, chairman of the upper house of the parliament, and governors in two of the four provinces, he said.

PML-N spokesperson Marriyum Auranzeb did not respond to a request for a comment.

Markets on Wednesday reacted positively to the news of an alliance, which removed days of uncertainty. Pakistan's benchmark share index rose 1.81%.

The index had fallen more than 5% since the elections.

Pakistan bonds recovered after three straight day of falls. The December 2027 bond was the biggest gainer, rising 2.58 cents, closely followed by the April 2031 bond which rose 2.54 cents.

PML-N's 79 and the PPP's 54 seats together make a simple majority in parliament to form a government, which, however, will also rope in smaller parties in the coalition.

Candidates backed by Imran Khan won 93 seats, but do not have the numbers to form a government. He and his party have rejected the results of the elections, alleging widespread rigging.

(Reporting by Ariba Shahid in Karachi; Writing by Sudipto Ganguly; Editing by Tom Hogue, Kim Coghill and Nick Macfie)

By Asif Shahzad and Ariba Shahid