UPDATE 2-Pakistan shares drop as uncertainty returns

(Adds comment, updates prices)

KARACHI, Aug 20 (Reuters) - Pakistan stocks fell nearly 4 percent on Wednesday as investors sold blue chips such as OGDC (OGDC.KA: Quote, Profile, Research, Stock Buzz) amidst uncertainty whether the coalition government's parties can work together to tackle pressing economic issues.

The benchmark Karachi Stock Exchange index .KSE fell as much as 3.99 percent in intra-day trade. It ended down 3.6 percent, the sharpest one-day fall in two weeks. The market is down about 25 percent this year.

Investors said they were losing hope President Pervez Musharraf's resignaton on Monday would ease Pakistan's political tension because the fractious coalition government did not see eye to eye on some major issues.

"With a host of tricky situations to be tackled in the medium term, a coalition marred by infighting is not likely to inspire confidence for market participants, locally or internationally," Imtiaz Gadar, an analyst at JPMorgan, said in a note.

Coalition leaders met for several hours on Tuesday but got bogged down by squabbles over the restoration of the judges ousted by Musharraf last year.

"Once the Musharraf (resignation) happened, everybody thought the coalition was going to work like a charm, but obviously that is not happening," said Asad Iqbal, the managing director at Ismail Iqbal Securities Ltd.

Iqbal said investors were also worried the party led by former prime minister Nawaz Sharif may join the opposition.

Sharif, whose Pakistan Muslim League (Nawaz) is the coalition's second-largest member, pulled some his party's ministers out of the cabinet in May after the coalition failed to reach an agreement on reinstatement of the judges.

Sharif said in May his party would continue to support the coalition and not join the opposition for the time being.

"Markets will be volatile until you know which way the political situation is going," Iqbal said.

After the coalition government said on August 7 it would begin impeachment proceedings against Musharraf, expectations Musharraf's resignation would ease political turbulence had pushed Pakistan shares up nearly 13 percent as of Tuesday to their highest in 3-½ weeks.

But the post-Musharraf euphoria is evaporating and investors now want the coalition government to prove its members can cooperate, and show they have the will to revive Pakistan's sickly economy.

Pakistan is fighting widening trade and fiscal deficits, falling reserves depleted by high oil prices, and soaring inflation.

Blue chips led losses on Wednesday. Oil and Gas Development Co Ltd, Pakistan's biggest firm by stock market value, fell 5 percent.

The firm posted a worse-than-expected 8.8 percent rise in full-year net profit on Wednesday, missing analysts' forecasts despite stronger sales.

MCB Bank (MCB.KA: Quote, Profile, Research, Stock Buzz), the country's largest bank by market capitalisation, fell 5 percent, and state-run Pakistan Petroleum Ltd (PPL.KA: Quote, Profile, Research, Stock Buzz) dropped 5 percent. ($1=74.10 rupee) (Reporting by Koh Gui Qing; Editing by Jerry Norton)