Mediator and former U.N. chief Kofi Annan has predicted the two sides will agree on a formula this week to overcome their dispute over the December 27 election that triggered violence killing more than 1,000 people and displacing 300,000.

Kenyan media, and sources close to the talks, say that will almost certainly be a power-sharing deal.

Odinga's Orange Democratic Movement (ODM) is no longer calling on Kibaki to step down, the sources say, while Kibaki's Party of National Unity (PNU) has dropped its demand the opposition take its grievances over the polls to court.

"On the threshold of a breakthrough," read The Standard's banner headline, one of many predicting success in the talks.

At the Maasai Mara national park, rangers even named a newly born rhino "Kofi Annan" in honour of his role.

Annan himself warned media against "speculation and rumours" at this delicate stage in his negotiating mission.

Both sides also tried to calm premature jubilation around a nation exhausted by violence and acrimony, much of it along ethnic lines among Kenya's more than 40 different groups.

Though triggered by the controversial presidential vote tally, the bloodshed in Kenya has exposed deep divisions over land, wealth and power that date back to British colonial rule and have been stoked by politicians in the decades since.

DEAL MAY TAKE A WEEK

Government negotiator Mutula Kilonzo, who said last week he was "1,000 percent confident" a deal was coming, urged patience.

"The media is selling a deal. It could be up to a week," he told reporters at a plush Nairobi hotel that has become the centre of international diplomatic efforts to end the crisis.

Odinga, 63, an ex-political prisoner and once a minister in Kibaki's cabinet, also declined to be drawn. "We will not carry out mediation talks through the media," he said at the weekend.

An ODM party spokesman told reporters at Monday's talks the negotiations were not simple.

"They're not just going to be cooked up any second. Negotiations are going to take a bit of time," he said.

"(But) we are very hopeful, like the Kenyan people are."

Both sides are said by sources in their parties to have agreed in principle on power-sharing, and are now focusing on the details.

The opposition says its larger numbers in parliament should give it a bigger share of cabinet posts. But the Kibaki side has the official ruling of the electoral board that he won the presidential vote, albeit narrowly.

The protests and rioting that began immediately after Kibaki's December 30 swearing-in spread to many parts of the nation, especially the Rift Valley and Nairobi slums that saw unprecedented scenes of violence.

The violence has subsided in recent days, but Kenya's image as a stable democracy and a regional hub for business, tourism and transport has been badly damaged.

Kenyan markets have taken a battering. The stock index has dropped about 12 percent and the shilling currency has fallen more than 10 percent against the U.S. dollar since the crisis began.

Both sides have already agreed principles to end violence and help refugees. Annan gave them until mid-February to resolve agenda item No. 3: what to do about the disputed election.

Deeper underlying issues, such as land grievances and wealth inequality, are to be tackled within a year.