* Cricketer-turned-politician's move could defuse tension
* Supreme Court decides to pursue case against prime minister
* Police try to keep hundreds of people out of capital

Pakistani opposition leader Imran Khan backed down from a threat to paralyse the capital on Wednesday, a move likely to ease tension that has spilled over into violence in the run-up to the planned protests.

Khan's vow to ‘shut down’ Islamabad to press a demand for Prime Minister Nawaz Sharif to resign or face a corruption inquiry had sparked a citywide ban on gatherings and the arrests of hundreds of opposition activists accused of defying the ban.

Instead of the protest, Khan on Tuesday said he would hold a ‘celebratory’ rally, following a decision by the Supreme Court to pursue a case linked to Sharif.

‘On the Supreme Court's advice, we have decided that tomorrow we will thank God and celebrate a day of thanks at (Islamabad's) parade ground,’ Khan told media, speaking outside his home in Islamabad.

In a bid to resolve the crisis, the Supreme Court said it would hold daily hearings on a petition challenging Sharif's eligibility for public office, claims linked to graft allegations stemming from the ‘Panama Papers’ leaks about his family's offshore wealth.

Khan had previously rejected the possibility of holding his protests on Islamabad's parade ground, as ordered by the city's High Court, and vowed to paralyse the capital with a turnout of a million protesters.

The tension unleashed fears Pakistan's economic recovery could be jeopardised if there were a prolonged crisis that could even draw in the powerful military, which has a history of meddling in politics and overthrowing civilian governments.

In the lead-up to Wednesday, there have been daily clashes between police and supporters of the cricketer-turned-politician, while the government has cracked down on workers of his Pakistan Tehreek-e-Insaf (PTI) party.

Authorities have arrested scores of party supporters and shut major motorways into Islamabad.

Pakistan's soaring stock market, which took a hit in recent days on the prospect of the protests, bounced sharply after Khan's decision to call them off.

Khan's challenge in the Supreme Court stems from the Panama Papers revelations and he has repeatedly demanded an independent investigation into the corruption allegations.

Documents leaked from the Panama-based Mossack Fonseca law firm in April appeared to show that Sharif's daughter and two sons owned offshore holding companies registered in the British Virgin Islands. Sharif's family denies wrongdoing.

Holding offshore companies is not illegal in Pakistan, but Khan has implied the money was gained by corruption. Khan admitted in May that he himself used an offshore company to legally avoid paying British tax on a London property sale.