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Morgan Tsvangirai, leader of Zimbabwe's main opposition Movement for Democratic Change (MDC), gestures during a news conference at his residence in Harare July 2, 2008. REUTERS/Philimon Bulawayo

GWERU, Zimbabwe (Reuters) - Zimbabwean opposition leader Morgan Tsvangirai said on Sunday his party would rather quit power-sharing talks than sign an unsatisfactory deal and challenged President Robert Mugabe to call a new election.

"We are saying to him you can call another election under international supervision and let's see who is going to win that race," he told a rally to celebrate the ninth anniversary of his Movement for Democratic Change (MDC).

Tsvangirai beat Mugabe in a March 29 election but fell short of enough votes to avoid a June run-off, which was won by Mugabe unopposed after Tsvangirai pulled out, citing violence and intimidation against his supporters.

"We would rather have no deal than a bad deal," Tsvangirai said.

The post-election talks are deadlocked over how to share executive power between Mugabe and Tsvangirai, putting off any chance of rescuing Zimbabwe from its economic collapse.

Mugabe has said he will form a cabinet with or without Tsvangirai.

MEDIATION STRUGGLE

South African President Thabo Mbeki, mandated by regional countries to mediate in the Zimbabwe talks, was expected to arrive in Harare on Monday. He has come under repeated fire for not being tough enough with Mugabe.

Other southern African leaders have taken a hard line against Mugabe. But he has refused to budge, and the MDC has made it clear it has little faith in Mbeki as a mediator.

"President Mbeki is coming, but don't worry about him. He is not the one who is going to sign the agreement. He is going to have to persuade me to shift my position," Tsvangirai told the rally in the city of Gweru in central Zimbabwe.

"But don't worry. One thing I will not do is to sell you out."

Zimbabweans hoped the election would usher in a new era of economic prosperity. Instead, there is no relief in sight from the world's highest annual inflation rate of over 11 million percent and severe shortages of basic goods.

The election run-off was condemned around the world and drew toughened sanctions from Western countries whose support is vital for reviving Zimbabwe's ruined economy.

A smaller, breakaway faction of the MDC, led by Arthur Mutambara, is the third party in negotiations aimed at forming a national unity government.

Tsvangirai told the rally an agreement was out of the question unless Mugabe, in power since independence from Britain in 1980, was prepared to compromise.

"The issue that we are facing here is that Mugabe must accept to surrender some of his powers for the power-sharing arrangement to work. If that doesn't happen there is no deal," he said, speaking in both English and the local Shona language.

Tsvangirai has stood his ground, despite mounting pressure for an end to a political crisis that has driven millions of Zimbabweans over the country's borders, straining regional economies.

"We have time on our side. And we have people behind us," he said.

(Writing by Michael Georgy; editing by Robert Hart)