They worsened after Musharraf called an emergency, sacked judges, detained lawyers, opposition and rights activists, and muzzled the media.
Many of those initially detained have been released, but others have been held since.
Sharif intends consulting with Bhutto's Pakistan People's Party to see if they can work out a common strategy.
Bhutto welcomed Sharif's return, saying she wanted a level playing field for all parties.
The signs are that Bhutto, who filed her nomination papers on Sunday, intends to contest the election.
Sharif party spokesman Ahsan Iqbal said Sharif was expected to file at a Lahore court house, but the party might later withdraw in the event of an opposition boycott.
Musharraf's camp hopes Sharif's party will take part, as a poll without the main opposition parties would lack credibility and ultimately undermine the president, one of Musharraf's close aides told Reuters.
Musharraf co-opted the rump of Sharif's Pakistan Muslim League after ousting him. Leaders of the ruling PML faction fear many of their party may now defect back to Sharif.
Regardless, investors in the Karachi stock market were encouraged by Sharif's return, as they believed it reduced chances of a boycott that could sow more instability. The index rose 0.7 percent on Monday morning.
"It seems the political uncertainty is being lessened every day and now investors are regaining confidence in the market," said Sajjad Mankani, head of sales at BMA Capital Ltd.
The index had shed almost 6 percent since emergency was imposed and has recovered most of its losses and is down only 1.2 percent since then. The index has gained nearly 37 percent since the start the year.
Ordinary folk, too poor to invest, have more to worry about than power plays between Pakistan's movers and shakers.
"Why do we import wheat when we produce ourselves? Why has prices of ghee has gone up from 37 rupees per kg to 105 rupees. The cost of living for poor people is too high," says 56-year-old rickshaw driver Ayub Niazi.
