Many Pakistani lawyers boycotted courts on Monday in a protest against President Asif Ali Zardari, who is embroiled in a potentially destabilizing dispute with the judiciary over the appointment of judges.
The row looks set to become a distraction for the government of the nuclear-armed U.S. ally, already struggling to fight Islamist militants and to get a sluggish economy on track.
Pakistani stocks fell as investors worried about political instability, which dealers said was likely to keep foreign investors away and could spark selling if it got worse.
Also on Monday, a suspected U.S. drone fired a missile into the North Waziristan region on the Afghan border, killing three militants, Pakistani intelligence officials said.
The attack came as U.S. forces are spearheading one of NATO's biggest offensives in Afghanistan against the Taliban, who get support from networks and sanctuaries in lawless areas on the Pakistani side of the border.
Pakistan has a history of disputes between the executive and the judiciary sparking instability and, in at least one case, bringing down a government in the 1990s.
The latest row erupted on Saturday when a Supreme Court panel blocked an order from Zardari issued earlier that day appointing two judges, one to the Supreme Court and the other as chief justice of the high court in the city of Lahore.
The court said Zardari's order was a violation of the constitution as the president had not consulted the Supreme Court chief on the appointments. The president's spokesman denied any impropriety, saying the chief justice had been consulted.
The Karachi Stock Exchange (KSE) benchmark 100-share index ended 1.06 percent, or 104.06 points, lower at 9,701.81, on worries the row could spread.
A confrontation between the Supreme Court and then president Pervez Musharraf in 2007 sparked a nationwide protest movement by lawyers which undermined Musharraf's authority. He stepped down months after his allies lost a 2008 election.
Black-suited lawyers were back on the streets on Monday in major cities across the country, protesting against the unpopular Zardari, husband of assassinated former prime minister Benazir Bhutto.
It's a bid to threaten the judiciary and send a message that the president is more powerful than anybody else, Qazi Mohammad Anwar, president of the Supreme Court bar association, told Reuters, referring to Zardari's bid to appoint judges.
We warn the government to stop this adventurism, stop constitutional adventurism. It will be harmful to them, he said.
Some lawyers burned an effigy of Zardari.
Pro-government lawyers also took to the streets in some cities.
The United States, struggling to stabilize Afghanistan, will be dismayed if the controversy distracts the government from battling militants on its Afghan border.
The judicial dispute also comes as Pakistan and India are preparing to hold their first official talks, on February 25, since India suspended a peace process after Pakistan-based militants attacked the Indian city of Mumbai in November 2008.
Pakistan said it had lodged a strong protest with India over what it called unprovoked firing by Indian forces into the Pakistani part of the disputed Kashmir region on Saturday night.
There have been several such brief exchanges of fire along the border in recent weeks. The latest incident was not likely to spark a bigger exchange or derail the planned talks.
Musharraf's long, bitter dispute with the judiciary over who should be chief justice distracted him from pressing ahead with his efforts to settle old disputes with India.
The latest judicial row comes two months after the Supreme Court threw out an amnesty that had protected Zardari, several top aides and thousands of political activists and civil servants, mostly from corruption charges.
The end of the amnesty sparked a political storm and raised questions about Zardari's future, even though he is protected from any prosecution by presidential immunity.
Despite immunity, Zardari is likely to face legal challenges to his eligibility to have stood for president in 2008.
In an ominous sign for Zardari, opposition leader Nawaz Sharif, who had been largely supportive of the government, denounced the president on Sunday as the biggest threat to democracy.
(Additional reporting by Faisal Aziz, Asim Tanveer, Mubashir Bukhari, Faris Ali and Gul Yousafzai; Writing by Robert Birsel; Editing by Raju Gopalakrishnan)