Security forces are surrounding the area where Bhutto is currently detained and dozens of Bhutto supporters have been arrested.
"I would not serve as prime minister under a man who has repeatedly broken his promises, who is a dictator," said Bhutto, who has previously held talks with Musharraf on sharing power.
"Look what he is giving to the nation - imposing an emergency, suspending the constitution and cracking down on democratic forces.
"We gave him a roadmap for a peaceful transition but he has flouted that," she said.
Pakistani police put Bhutto back under house arrest at the home of a party official hours before she was to lead a protest rally to the capital, Islamabad.
As hundreds of extra police moved in around the home where she was staying and set up barricades on streets, a senior government official said her planned procession would not be allowed.
Aftab Cheema, the Lahore
police chief, said that Bhutto had been served with a week-long detention notice.
Police have said Bhutto could be the target of a suicide assassination bid, like the one that killed 139 people at a rally last month welcoming her back from eight years in self-imposed exile.
Last week, police blocked her from leaving her Islamabad home to hold a rally in the nearby city of Rawalpindi.
Al Jazeera correspondent James Bays met several opposition politicians in hiding or under virtual house arrest, including Imran Khan, the former cricketer now head of Pakistan Tehreek-e-Insaf party, Tehmina Daultana, an MP close to exiled former prime minister Nawaz Sharif and Qazi Hussain Ahmad, president of the Jamaat-e-Islami.
All said it would be impossible to contest an election under the emergency rule Musharraf imposed on November 3.
Musharraf, who suspended the constitution, sacked most judges, locked up lawyers, rounded up thousands of opposition and rights activists and curbed the media, has come under mounting pressure from Western allies to set Pakistan back on the path to democracy.
"I am very worried and angry - Musharraf should realise that we don't need him"
Avas, Islamabad, Pakistan
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He said on Sunday general elections would be held by January 9 but declined to say when the constitution would be restored, saying the emergency rule would ensure a free and fair vote.
Ban Ki-moon, the UN secretary-general, and George Bush, the US president, on Monday urged Musharraf to lift the emergency.
And the British Commonwealth gave Musharraf 10 days to lift the state of emergency or have the country suspended from the group.
While suspension would be largely symbolic, it could have implications for development assistance.
Pakistan was suspended in 1999 following the military coup that brought Musharraf to power but readmitted in 2004 after perceived progress on democratic reforms.
Source: Al Jazeera and agencies