The meeting, which lasted for two and a half hours, was their first since President Pervez Musharraf ousted Sharif in a bloodless and popular military coup in late 1999.
Opposition against Musharraf has fallen into disarray without any strong personality inside Pakistan. Parliamentary elections are due in 2007.
Bhutto was accompanied by her husband Asif Ali Zardari, who was released on bail in November after spending eight years in jail on charges ranging from murder to corruption.
Pakistan Muslim League-Nawaz issued a statement after the meeting saying Pakistan must revert to "real democracy" as soon as possible through free, fair and transparent elections.
"Both parties will co-operate and work at every level to achieve this sacred goal," it said. "They resolved that they would not act in any way that would help non-democratic forces to negate ... democratic rights of the people of Pakistan."
Pakistan People's Party (PPP) issued a similar statement. "Both leaders agreed to adopt a minimum programme for restoration of democracy in Pakistan," it said.
Musharraf secured a mandate to become president after holding a referendum in 2002, which critics say was rigged in his favour. Parliamentary elections in the same year brought a pro-military government to power.
He argues that genuine democracy is working in Pakistan and rejects calls for elections earlier than 2007.
The Muttahida Majlis-i-Amal provides the main opposition to Musharraf, who has co-opted the rump of PML-N to back his government.
Many observers, however, believe General Musharraf's natural constituency lies within the more liberal ranks of the PPP, but mutual dislike with Bhutto has prevented any deal so far.
Musharraf, who has in the past derided both former prime ministers as venal politicians, has made reconciliatory moves in recent months - most notably through the release of Zardari.
The government also returned the passport of a nephew of Sharif to let him go abroad to see his family. Political observers believe Musharraf may be seeking to find favour with the PPP and the PML-N after angering the MMA by going back on his promise to step down as army chief by the end of last year.