Muslim clerics and students are demanding that the Sharia law replace Pakistan's civil law.
Watch Al Jazeera's exclusive report from the Lal Masjid
Abdul Rashid Ghazi, one of the two influential brothers running the Lal Masjid, said the two policemen will be freed upon the release of five members of the mosque and 40 students arrested on Sunday and Monday.
The religious leaders have, through thousands of students, kidnapped a brothel owner, demanded the closure of music and video shops, set up an Islamic court and threatened suicide attacks if the mosque is raided.
Pakistan's interior ministry on Tuesday said the government wants to negotiate with Lal Masjid rather than risk bloodshed through use of force.
But the government's refusal to get tough with conservatives has puzzled observers.
The opposition has accused intelligence agencies of manipulating events to divert media attention from the judicial crisis triggered by Musharraf's controversial suspension of the country's top judge.
Farhatullah Babar, a Pakistan People's party spokesman, said on Tuesday the abductions were "happening with the connivance of the government", or just a ruse to justify declaring a state of emergency.
"It would be in the best interests of Pakistan for Musharraf to step down"
Jim ibarra, Cyberjaya, Malaysia
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He accused the government of allowing the Lal Masjid incident to show the West "that religious extremists are very assertive and can be dealt with only by a military dictatorship.
"Therefore the West should support Musharraf."
Pakistan's religious parties have also distanced themselves from the mosque's leaders.
But the opposition's theory has raised questions over what Musharraf, a key US ally in the "war on terror", will gain by exposing his government's failure to contain local extremism.
"I don't think there's connivance. The situation has got too much out of control," said Talat Masood, a former Pakistani general and political analyst.
"Now these people [at Lal Masjid] have become powerful, and Musharraf is becoming helpless."