The move against the PPP leader and the former prime minister came amid a broader crackdown on her supporters.
The Pakistani government has deployed 6,000 police officers in Rawalpindi to prevent the planned rally against the state of emergency imposed by Musharraf last week.
Police have completely locked down the venue for the protest in the garrison city near capital Islamabad on Friday.
James Bays, Al Jazeera's correspondent in Islamabad, said: "All the way along the route from Islamabad to Rawalpindi, there are police ... and the city of Rawalpindi appears to be effectively sealed off."
PPP leaders claimed police have arrested 5,000 of its supporters since Wednesday to head off the major rally.
"It is a massive crackdown on our party," Raja Javed Ashraf, a PPP legislator, said.
On Thursday, Musharraf said elections would be held before February 15 and reiterated he would step down as chief of the country's army while maintaining the presidency, state television reported.
"Musharraf has many enemies in his country and I believe with Bhutto as PM there would be more people supporting the goverment"
Howahr, Doha, Qatar
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National elections had originally been scheduled for January but appeared in jeopardy after Musharraf imposed emergency rule on Saturday.
"I have been saying for the last few months that elections will be held on schedule. There is no doubt in my mind that elections should be held on time as soon as possible... It was my commitment and I am fulfiling it," Musharraf told official media after chairing a meeting of the National Security Council.
But Bhutto told the BBC in an interview broadcast overnight that Musharraf's pledge to hold elections by mid-February and quit as army chief were not enough to stem the political crisis gripping the country.
"It is too vague, it is too general, it is an attempt to break the momentum of the opposition," she said, calling for Musharraf to take off his uniform by November 15 at the latest.
But she turned on Musharraf on Wednesday, vowing to press on with the Rawalpindi protest and to hold a "long march" from Lahore to Islamabad on November 13 if he does not meet her demands.
Tariq Azeem, the deputy information minister, said: "Two of the main issues demanded by Benazir Bhutto have been addressed and there is no point for her to hold this rally. It's complete political point-scoring on her part."
Musharraf's election announcement Thursday was welcomed by the US and Britain but both urged further steps, including the restoration of the constitution.
Senior US senators meanwhile sought to put pressure on Musharraf, introducing a resolution urging a review of military assistance to Pakistan while the state of emergency remains in effect.