Sharif was earlier in the day banned by the Electoral Commission from taking part in the polls.
"If these demands are not met then we will go ahead with a boycott of the elections," he told a joint press conference with Bhutto after a three-hour meeting between the one-time rivals in Islamabad.
Partnership of rivals
"The committee will meet from tomorrow and we hope to finalise the charter of demands in the next two to three days," he added.
"In the present circumstances, free, fair and transparent elections seem impossible."
Bhutto said the charter of demands was a "major confidence-building step" between the two opposition leaders after days of contemplating whether to boycott the polls.
"We had a consensus during today's meeting that the election announced by the government will not be free and fair," she said.
However, both were vague on what conditions they could agree on.
“We reserve the right to boycott the elections at a later stage," Bhutto said.
Sharif had previously called for an outright boycott of the elections saying they will be rigged while Bhutto has said that her party would take part "under protest".
The opposition leaders gave no indication of how much time they would give the authorities to comply with their ultimatum.
Bhutto, of the Pakistan People's party (PPP) and Sharif, who leads the Pakistan Muslim League, have criticised Pervez Musharraf, the president of Pakistan for imposing a state of emergency on November 3.
Musharraf has pledged to end the emergency on December 16.
Sharif banned
Earlier on Monday, elections authorities rejected Sharif’s nomination papers for the January 8 elections.
Sharif said he was not discouraged when electoral officials banned his candidacy on the grounds that he was convicted of criminal charges in the wake of Musharraf’s coup in 1999.
"The rejection of my nomination papers has not shaken my determination. It is democracy versus dictatorship," he said.