Marathon talks between the ruling Zanu-PF and opposition Movement for Democratic Change (MDC), seen as Zimbabwe's best chance to end a post-election crisis and raise hopes of economic recovery, have so far failed to secure a breakthrough.

After a second day of discussions, President Robert Mugabe told reporters and supporters on Monday there was progress in talks with MDC leader Morgan Tsvangirai and breakaway MDC faction leader Arthur Mutambara. But a Zanu-PF official told Reuters the talks were in danger of failure.

"Mr Tsvangirai is moving goal posts, forcing us to negotiate issues which we had already agreed upon," he said, referring to whether Mr Mugabe would head a new unity government. An MDC source said Mr Mugabe refuses to give up executive powers.

Talks began in July after Mr Mugabe's unopposed re-election in a June poll condemned throughout the world as unfair and boycotted by Mr Tsvangirai because of attacks on his supporters.

There are a host of formidable issues. First and foremost is whether Mr Mugabe will be ready to give up powers that helped him keep a tight grip. Who will control security forces is another critical question. Mr Mugabe, who has increasingly relied on the army for support, conferred medals on 16 generals, three of them posthumously, in a ceremony yesterday honouring Zimbabwe's military.

The festivities could come in handy as Mr Mugabe tries to keep powerful figures on his side during the crucial talks. The head of the Central Intelligence Organisation was also honoured.

"I suspect that long before we get to the summit there will be some decision coming out of Zimbabwe," Aziz Pahad, Deputy Foreign Minister of South Africa, whose President Thabo Mbeki is chief mediator in the talks, told reporters in Pretoria.

Mr Mbeki could score a political coup if a deal is reached before a weekend regional summit of the SADC group of nations. The South African leader has been under fire for not being tough with Mr Mugabe, a policy he says would aggravate tensions.

Investors are likely to remain cautious even if there is a breakthrough, seeking reassurances that any new government can rescue what was once one of Africa's most promising economies and safeguard their money, analysts say.

Nic Borain, a political consultant at HSBC, said Zanu-PF and the opposition have few options.

"I don't foresee a total breakdown where there would essentially be war on the streets or at least very high levels of repression and exclusion," he told Reuters.

"I don't think they (talks) will remain on the rocks, because I think all the parties eventually have no way out of it other than talking to each other."