New Delhi has accused Pakistan of supporting "cross-border terrorism" after gunmen killed 26 people on April 22, the worst attack on civilians in contested Muslim-majority Kashmir for a quarter of a century.

Islamabad has denied any role, calling attempts to link Pakistan to the attack "frivolous" and vowing to respond to Indian action.

Relations between the nuclear-armed rivals have plunged to their lowest level in years, sparking worries by analysts of possible military action.

The attack also sparked a huge manhunt for the gunmen in Kashmir, with Indian security forces blowing up nine homes of suspected rebels, as well as detaining nearly 2,000 people for questioning, a senior police official told AFP.

"Punish the guilty, show them no mercy, but don't let innocent people become collateral damage," Jammu and Kashmir's Chief Minister Omar Abdullah said in a statement.

Aga Ruhullah, a federal lawmaker from Kashmir, said: "Kashmir and Kashmiris are being given a collective punishment."

Security operations in the search for the gunmen come as India and Pakistani forces have exchanged fire across the de facto border in the rugged and remote high-altitude Himalayan outposts.

- 'Revolving door' -

India's army said on Monday its troops and Pakistani forces had fired at each other for a fourth night in a row.

There were no reported casualties. Islamabad did not immediately confirm the gunfire from Pakistan.

"During the night of April 27-28... Pakistan Army posts initiated unprovoked small arms fire across the Line of Control," the Indian army said in a statement, referring to the de facto border in contested Kashmir.

"Indian troops responded swiftly and effectively," it said.

Muslim-majority Kashmir has been divided between India and Pakistan since their independence from British rule in 1947.

Both claim the territory in full.

Rebels in the Indian-run area have waged an insurgency since 1989, seeking independence or a merger with Pakistan.

Indian police have issued wanted posters for three men -- two Pakistanis and an Indian -- who they say are members of the Pakistan-based Lashkar-e-Taiba group, a UN-designated terrorist organisation.

They have announced a two million rupee ($23,500) bounty for information leading to each man's arrest.

India is also hunting several of its own citizens in connection to the killings, sweeping up those they suspect may have information on the attackers.

"It's a revolving door in police stations as part of the ongoing investigation," said a senior police official who spoke on condition of anonymity because they were not authorised to talk to the media.

"Some have already been let go, and more are being summoned to police stations," the officer said.

The homes of men suspected of having links to the attackers have also been blown up at night.

Yasmeena, the sister of fugitive accused Ashif Sheikh, said her family was being punished, with their home demolished even though they had not seen her brother for three years.

"If my brother is involved, how is it the family's sin?" she said.

"This house doesn't belong to him alone."

- 'Exercise restraint' -

New Delhi has downgraded diplomatic ties since the attack, withdrawn visas for Pakistanis, suspended a water-sharing treaty, and announced the closure of the main land border crossing with Pakistan.

In response, Islamabad ordered the expulsion of Indian diplomats and military advisers, cancelled visas for Indian nationals and barred its airspace to Indian airplanes.

India's Defence Minister Rajnath Singh met with Prime Minister Narendra Modi on Monday after warning last week that those responsible for the attack in Kashmir would see a response "loud and clear".

The United Nations has urged the arch-rivals to show "maximum restraint" so that issues can be "resolved peacefully through meaningful mutual engagement".

China, which shares a border with both India and Pakistan, urged both sides on Monday to "exercise restraint, meet each other halfway" and "properly handle relevant differences through dialogue", foreign ministry spokesman Guo Jiakun said.

Iran has already offered to mediate, and Saudi Arabia has said Riyadh was trying to "prevent an escalation".