Musharraf imposed a two-term limit on the prime ministership in 2002, which currently bars both Sharif and opposition leader Benazir Bhutto from another stint.
Bhutto flew to Islamabad from the southern city of Karachi on Friday to meet her party leadership. She made no comment.
Having spent eight years trying to marginalise Sharif, and having allowed Bhutto back last month, Musharraf appears to have admitted his failure to re-engineer Pakistan's polity, sundered by the coup that ended a decade of chaotic civilian rule.
Musharraf co-opted the rump of Sharif's Pakistan Muslim League after ousting him. Confusingly there are now two PMLs, although Sharif's is usually referred to as the Nawaz League.
Aaj Television quoted Chaudhry Shujaat Hussain, leader of the ruling PML, as saying that the party was not scared that its former boss Sharif was coming back.
Hussain was probably putting on a brave face, as many of his party could flock to Sharif's banner, given that Musharraf and his intelligence officials appeared to have done a deal.
News that Sharif would soon return, and talk that the emergency might soon be lifted, buoyed the Karachi stock market, which was up 1.2 percent. It has now clawed back much of the 6 percent it shed following emergency rule on November3.
But many ordinary Pakistanis are despondent.
"(Sharif's) return will make no difference because no system is working here," said Sehar Ali, a schoolteacher.
A Supreme Court packed with government-friendly judges finally gave Musharraf satisfaction on Thursday, ruling that his October 6 re-election by parliament had been valid.
He is now expected to quit the army and be sworn in for a second five-year term as a civilian, but analysts doubt that he can last that long with both Bhutto and Sharif back.
The Commonwealth Ministerial Action Group (CMAG), meeting in Uganda overnight, suspended Pakistan's membership "pending the restoration of democracy and the rule of law in that country", Secretary-General Don McKinnon told a news conference.
Musharraf has already started to roll back the emergency, releasing some 5,000 opposition activists and lawyers rounded up after it was imposed. Private TV channel ARYone World resumed broadcasting on Friday after it was suspended along with a number of others amid stiff media curbs.
