After defying expectations with a series of breakthrough talks between Indian Prime Minister Atal Behari Vajpayee and Pakistani President Pervez Musharraf, their foreign ministers and foreign secretaries, the leaders issued a joint statement announcing a dialogue which would tackle their 56-year-dispute over Kashmir.

"The two leaders agreed to commence the process of composite dialogue in February 2004," India's Foreign Minister Yashwant Sinha announced to reporters.

"The two leaders are confident that the resumption of the composite dialogue will lead to peaceful settlement of all bilateral issues including Jammu and Kashmir to the satisfaction of both sides."

Musharraf said the breakthrough was nothing short of history.

"History has been made," he declared at a 70-minute press conference.

"We have never reached in the past where we have reached now."

Kashmir, a mountainous region straddling the neighbours' northern regions, is claimed by both and divided between them.

The dispute has caused two of three wars between the countries and brought them to the brink of a fourth war, which many feared would turn nuclear, in

Pakistan had long demanded a referendum among Kashmiris to choose rule by Pakistan or India, while India insists the region is an integral part of its territory.

Musharraf backed down on the referendum demand in a major concession in the lead-up to the summit.

The joint statement was issued at the conclusion of a seven-nation summit that brought the historically hostile neighbours together for the first time in over two years.

India demanded an end to "violence, hostility and terrorism" in the statement, while Musharraf assured that he would not allow terrorist activities on Pakistani soil.

They were referring to militants who have been waging a violent insurgency against Indian rule in its zone of Kashmir that has killed tens of thousands of people since 1989.

New Delhi has traditionally accused Pakistan of funding, training and arming the rebels and letting them operate from its territory.

Musharraf, who survived two assassination attempts just ahead of the summit that were blamed on Islamic militants angered by his moderate policies, said he anticipated further backlash to the peace bid with India.

"I do believe there will be a fallout among extremists," he said.

"There are extremists on both sides who may not want peace, who have extremist positions ... who may like to sabotage this.

"We must be strong... Whatever shade and colour and we'll take them to task."

No timeframe had been set for a resolution or conclusion of dialogue, but he urged speed.

"If all goes well, if there is sincerity and desire for moving forward, we should move as fast as possible. The sky is the limit."

Musharraf refused to be drawn out on issues of disagreement, saying: "The time has come where if we want to proceed further we need to leave behind the old divergences."

US Secretary of State Colin Powell praised the talks as "historic" and lauded the "statesmanship" of the two leaders while Germany and United Nations Secretary General Kofi Annan also welcomed the deal.

"I think it is wonderful news, what is coming out of Islamabad," Annan told reporters.

At the earlier ceremony closing the 12th summit of the South Asian Association for Regional Cooperation (SAARC), other regional leaders hailed the three-day meeting as a "watershed" for the region.

"I believe the summit marks a key watershed in enhancing South Asian regional cooperation," Bangladeshi Prime Minister Khaleda Zia declared.

Enmity between SAARC's biggest powers has hampered the region's development, and leaders said they were buoyed by the momentum for peace.

Pakistan's Prime Minister Zafarullah Jamali hailed key agreements on counter-terrorism, poverty alleviation and the transformation of South Asia into a free trade zone from 2006.

"These are watershed developments which will go a long way in promoting fruitful economic cooperation," he said, praising the summit for "reinvigorating regional cooperation."

Heads of state and government plus foreign ministers of Bangladesh, Bhutan, India, the Maldives, Nepal, Pakistan and Sri Lanka signed the South Asia Free Trade Area (SAFTA) agreement, a social charter, an anti-poverty plan, an updated counter-terrorism agreement and the "Islamabad Declaration."

South Asia's 1.4 billion people make up one-fifth of humanity and nearly half of the world's poor, earning an average 450 dollars annually.

WAR.WIRE