Nuclear-armed India and Pakistan on Tuesday took significant strides towards fully normalising two-way trade in the latest sign of warming ties between the longtime foes.

The countries said in a joint statement that "overall progress" had been made to "fully normalise the bilateral trading relationship" after Islamabad said early this month it would give India most-favoured nation (MFN) status.

Pakistan has pledged to open up its market for over 7,000 goods from India over the next three months and says India should have MFN status by the end of 2012, the Press Trust of India reported.

At present Pakistan allows the import of just under 2,000 Indian items.

The Pakistani cabinet has "given us the mandate to go forward the whole hog to normalise the trade relationship completely and today we're very optimistic," Pakistani Commerce Secretary Zafar Mahmood said.

His statements followed two days of talks in the Indian capital between him and India's Commerce Secretary Rahul Khullar to flesh out plans to normalise commerce.

Deepening economic engagement between the two countries, which have fought three wars against each other since independence from Britain in 1947, is seen as crucial to establishing lasting peace in the troubled South Asian region.

India granted Pakistan MFN status in 1996 and has been pushing Islamabad since then to reciprocate. The MFN status is intended to remove discriminatory higher pricing and duty tariffs that are barriers to trade.

Analysts say the decision to ease trade barriers will open huge opportunities in sectors from farming and textiles to pharmaceuticals for the two countries.

"The sky is the limit," Pakistan's commerce secretary told India's CNN-IBN news. "Trade will rise manifold."

While formal trade between the two most populous and largest economies in South Asia is a paltry $2.7 billion annually, unregulated trade, much of it routed through third countries, is estimated at $10 billion.

As a first step, Pakistan will increase the number of goods that can be traded, while only a small number of items in areas such as engineering will be placed on a "negative list" that cannot be traded.

That list is expected to be phased out entirely by the end of 2012 and Mammood said MFN status would be effectively granted to India when the negative list is abolished.

Khullar said Tuesday's announcement should improve trade "considerably".

The statement also said India and Pakistan have reached a "broad understanding" to "substantially liberalise" business visas which would help spur trade.

The trade breakthrough comes after the peace dialogue between the two countries was resumed in February. It was put on hold following the 2008 Mumbai attacks by Pakistani militants in which 166 people died.

"They (the commerce secretaries) expressed hope that positive developments in the trade track would encourage similar progress in other components of the dialogue process," the joint statement said.