Egypt's military high council has promised to lift the country's 30-year state of emergency when the "current situation has ended".
The televised statement came as crowds gathered in the capital Cairo for fresh protests.Demonstrators have been angered by President Mubarak's announcement on Thursday that he will not step down.
Crowds are gathering outside the presidential palace, Tahrir Square and the offices of state TV in the city.
The army said in what it called "Communique No 2" that it "confirms the lifting of the state of emergency as soon as the current circumstances end".
It endorsed the transfer of President Mubarak's powers to his vice-president, General Omar Suleiman, and guaranteed a free and fair presidential election, constitutional changes and "protection of the nation".
The army also urged "the need to resume orderly work in the government installations and a return to normal life, preserve the interests and property of our great people".
The lifting of Egypt's state of emergency has been a key demand of the protesters.
However, the BBC's Yolande Knell in Cairo says the army statement, which throws its weight behind President Mubarak's decision not to resign, will be a huge disappointment for demonstrators.
Although concessions offered by President Mubarak should in theory lead to a transformation of the political system, there is little confidence that the army or the government will deliver.
Most of the cabinet appointed by Mr Mubarak was made up of old loyalists, and the army leadership is handpicked by the president.
Many of these people have promised free elections in the past, promises that have never been fulfilled, and protesters feel that staying on the street is the only way to ensure a genuine transition to a democratic system.
The scene is now set for a potentially dangerous confrontation between the army and the protest movement.
The generals have repeatedly said they would not use force against the people. But many now fear that soldiers may be forced to abandon this approach, if the survival of the regime of which the top brass are an integral part is at risk.
Most of the cabinet appointed by Mr Mubarak was made up of old loyalists, and the army leadership is handpicked by the president.
Many of these people have promised free elections in the past, promises that have never been fulfilled, and protesters feel that staying on the street is the only way to ensure a genuine transition to a democratic system.
The scene is now set for a potentially dangerous confrontation between the army and the protest movement.
The generals have repeatedly said they would not use force against the people. But many now fear that soldiers may be forced to abandon this approach, if the survival of the regime of which the top brass are an integral part is at risk.
Meanwhile, the BBC's Jon Leyne in Cairo says Friday's mass protests could bring demonstrators into direct conflict with the army.
It is the most dangerous moment so far in more than two weeks of protests, he adds.Mass protest marches got under way following Friday prayers at midday (1000 GMT).
There was a stand-off outside the offices of state TV, with troops sealing off the building and keeping back a large crowd.
Leading Egyptian opposition figure Mohamed ElBaradei tweeted: "Entire nation is on the streets. Only way out is for regime to go. People power can't be crushed. We shall prevail. Still hope army can join."
Cairo resident Sherine Barakat told the BBC on Friday that she did not think there would be violence between the protesters and the army.
"Yesterday in the square soldiers were saying: 'If you march to the palace, no officer will stand in your way'. I think the army will help the people," she said.
Crowd's fury In his televised speech on Thursday evening, Mr Mubarak said he planned to stay in office until September's polls. He pledged to hand over some powers to Mr Suleiman but the details were unclear.
The Egyptian embassy in Washington said the changes meant Mr Suleiman was now the de facto president.
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Mr Mubarak had been widely expected to stand aside. Instead, his announcement has left uncertainty and confusion, analysts say.
After the speech, US President Barack Obama said the Egyptian people had been told there was a transition of authority "but it is not yet clear that this transition is immediate, meaningful or sufficient".
Expectations that Mr Mubarak might leave began to circulate on Thursday afternoon when a statement by army chiefs said it would remain "in continuous session" to discuss how to safeguard "the aspirations of the great Egyptian people".
Hossam Badrawi, the new secretary general of the governing NDP, then told the BBC he would be surprised if Mr Mubarak was still president on Friday.
The anti-government protests that began on 25 January were triggered by widespread unrest in Egypt over unemployment, poverty and corruption.
They followed a popular uprising in Tunisia which brought about the downfall of President Zine al-Abidine Ben Ali.
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