Musharraf and Shaukat Aziz, the prime minister, held crisis meetings with senior officials on Sunday to weigh options on how to end the standoff.
"The madrassa's committee, an 11-member group, have been frantically trying to convince the prime minister that this should be resolved peacefully.
"The government is between a rock and a hard place. They will tell you they want to avoid casualities; they lost one of their finest officers yesterday.
"But the government is also at pains to say that no one is authorised to challenge its authority."
The Pakistani president emphasised that the priority continues to be saving women and children inside the mosque whom the government say are being held as human shields.
Pakistani officials also said that al-Qaeda-linked fighters had seized control of the mosque.
Ijaz ul-Haq, the religious affairs minister, said the government believed the mosque's deputy leader, Abdul Rashid Ghazi, had effectively been deposed by the extremists.
"Ghazi is no longer in control. The hardcore militants are in control of the mosque," he said.
"Our fear is that they may start killing the women and children to press for their demand for safe passage."
Talking about the high-level meetings in the morning, one official said there was growing agreement that there should be an operation to end the standoff.
"The final assault could come in a day or two but efforts will continue to secure the safe release of women and children inside the complex," the official said.
Private television stations in Pakistan reported that Musharraf had given the "go ahead signal for a final assault" but did not say when it was likely.
Haq said that inside the mosque there were "terrorists who are wanted within and outside Pakistan. These terrorists have links with Arabs".
One or two fighters from Uzbekistan were also involved, he said.
Sporadic gunfire broke out after nightfall. Security forces also made announcements over loudspeakers urging the hold-outs to surrender.
Suspected Islamic fighters meanwhile shot dead three Chinese men in Peshawar, the capital of the North West Province bordering Afghanistan, on Sunday.
A fourth Chinese man was wounded in the raid at their residence in what security sources termed an apparent revenge attack over the mosque siege.
Students affiliated to the mosque have troubled the government with an anti-vice campaign since January, which has involved the abduction of several people they linked to prostitution, including seven Chinese.
|The Red Mosque has been besieged |
for seven days [AFP]
Security officials said that two Pakistani commanders from Harkatul-Jihad-e-Islami, a group linked to the beheading of US journalist Daniel Pearl and 2003 attempts to assassinate Musharraf, were inside the mosque.
Fifteen of those inside the mosque have been issued with suicide jackets, one senior official said, citing intercepts.
On Sunday, the government released 152 students who were detained after leaving the mosque.
Aziz reiterated the government's call for those in the mosque to release men, women and children allegedly being held as human shields and surrender.
Ghazi, 43, remained defiant. He and his followers have written wills saying that they would die rather than surrender, and that "martyrdom" would spark an Islamic revolution in Pakistan, a source at the mosque told AFP.
"Our blood will not go to waste," Ghazi's will said.
Leaflets meanwhile have been distributed in Miranshah, the main town in the troubled North Waziristan tribal district bordering Afghanistan, urging Muslims to take up arms in revenge for students killed in the mosque.