The decision to give negotiations a chance came after Pervez Musharraf, Pakistan's president, and Shaukat Aziz, the current prime minister, held crisis meetings with senior officials to weigh options on how to end the standoff.House arrest
Aziz said on Monday that the government would allow Abdul Rashid Ghazi, the mosque's deputy leader, to be held under house arrest with his mother if he surrenders and frees women and children inside the Red Mosque.
"We are trying to avoid loss of life and using all negotiating options to end this crisis, including house arrest for Ghazi and his old mother," he told reporters.
Kamal Hyder, Al Jazeera's correspondent in Islamabad said: "Musharraf met with his highest security chiefs, at a time when there is now growing opposition to the standoff, and people are saying that it should be ended peaefully.
"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."
Pakistani officials also said that al-Qaeda-linked fighters had seized control of the mosque.
|Security forces have urged students inside|
the mosque to surrender [AFP]
Ijaz ul-Haq, the religious affairs minister, said the government believed the mosque's deputy leader, Abdul Rashid Ghazi, had effectively been deposed.
"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."
Sporadic gunfire broke out after nightfall. Security forces also made announcements over loudspeakers urging the remaining students to surrender.
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.