In London, Bhutto said the talks were at a "standstill" because members of the ruling party objected to working with her Pakistan People's Party, the country's main opposition party which she has led from exile.
But in Pakistan, ruling party officials blamed Bhutto, saying she had demanded too many concessions and they would not let "a corrupt politician like her" return and take part in politics.
Bhutto said she plans to return to Pakistan soon, even without an agreement assuring she would not face corruption charges there.
"We understand that there is severe reaction within the present ruling party to any understanding with the Pakistan People's Party," Bhutto said. "Due to that reaction, no understanding has been arrived at, and we are making our own plans to return to the country."
The two camps had been negotiating an agreement for Musharraf to resign as army chief, ending military rule of Pakistan since he seized power in a 1999 coup. Bhutto also wanted the president to give up the power to dismiss the government and parliament. However, she has failed to win a public commitment from Musharraf on those two critical points.
A collapse of the talks would increase the risk of instability and turmoil in Pakistan and likely alarm the country's Western backers, including the United States, which is hoping the next government will maintain the country's fight against the Taliban and al-Qaida.
Musharraf is seeking re-election to another five-year term in presidential elections expected in September or October. But with his popularity plummeting and challenges to his rule growing, he turned to Bhutto for help to broaden his public support.
Without the power-sharing agreement, he would face potential challenges from Bhutto, who wants to return home to contest parliamentary elections in January. Another former leader and Musharraf opponent, Nawaz Sharif, is also preparing to return to Pakistan.