NEW DELHI (Reuters) - Indian and Pakistani forces traded fire across their frontier for a fourth day on Monday raising fresh fears hostility between the nuclear-armed neighbors could drag them into war.
Financial markets in both countries were badly hit by war fears but despite signs India was preparing for conflict, most analysts said India was likely to exhaust all diplomatic channels before taking a military option.
Armed Indian Army soldiers move out of a bunker somewhere on the International Border near Jammu, India, on Monday, May 20, 2002. Tension on the border between India and Pakistan has increased with increasingly heavy exchange of fire between the two nuclear rivals. (AP Photo/Channi Anand)
India on Sunday streamlined its armed forces' command by putting paramilitary border forces under army control and the coast guard under the navy.
Foreign Minister Jaswant Singh said the move was "standard operating procedure" when preparing for war.
But as part of its diplomatic efforts, senior Indian defense officials were due to brief their U.S. counterparts in Washington on Monday.
Bloody guerrilla attacks that India has blamed on Pakistan-based militants, that have fueled the border tension, would be high on the agenda.
"What is happening on the border, cross-border terrorism and Jammu and Kashmir", a defense ministry spokesman told Reuters.
"The entire gamut will come up."
Nearly a million men -- backed by tanks, missiles and warplanes -- have been mobilized by Pakistan and India on their border since a December raid on the Indian parliament that New Delhi blamed on Pakistan-based rebels.
TENSION SURGES, VILLAGERS FLEE
Fears of large-scale conflict surged after an attack on an Indian army camp last week that India again blamed on Pakistan-based militants fighting its rule in Muslim-majority Jammu and Kashmir state where a separatist revolt has raged for 12 years.
Some 34 people, many of them children and wives of Indian soldiers, were killed along with the three assailants, in last Tuesday's attack.
India says Islamic guerrillas fighting its rule are operating freely from Pakistan -- a charge Pakistan denies.
New Delhi was expected to press Washington to get Pakistan -- a vital ally in the U.S. war on terror -- to live up to a January pledge to crack down on what New Delhi says are Islamic militants battling its forces in Kashmir.
On the weekend, India expelled Pakistan's chief envoy in protest against last week's raid that Pakistan has strongly condemned.
An Indian defense official said its forces used heavy machine-guns and mortars against Pakistani positions in Monday's fighting. A Pakistani official said three villagers were killed while the Indian official said there had been no casualties.
Thousands of panicked villagers have fled Indian border areas over the past few days, joining an estimated 60,000 who ran away after tension mounted last December.
Late last week, the United States gave strong signals it would soon send Deputy Secretary of State Richard Armitage to the region to try to cool the tension.
In addition to fears a war could spin out of control, U.S. officials are worried conflict between India and Pakistan could disrupt its drive to hunt down members of Osama bin Laden's al Qaeda network and endanger U.S. troops stationed in Pakistan.
"The U.S. presence in Pakistan is one of the deterrents to India exercising the military option. But it's one of many factors," foreign policy analyst K.K. Katyal told Reuters.
"An armed conflict between India and Pakistan would come in the way of America's crusade against terrorism," he said. "The Taliban and al Qaeda leaders are still intact and said to be in Pakistan. So the U.S. needs help from Pakistan and will not allow anything to distract Pakistan's attention from the job."
Bin Laden is prime suspect in the September 11 attacks in the United States.
As war fears mounted, Prime Minister Atal Behari Vajpayee met opposition party leaders to discuss the next move of his government led by Bharatiya Janata Party (BJP).
Vajpayee has faced pressure from some hawkish BJP members for a strike on some of the dozens of militant training camps that Indian officials say have sprung up recently in Pakistan Kashmir.
But A.B. Bardhan, a leader of the Communist Party of India (Marxist), said he told Vajpayee "war could not solve this problem".
He also said talk of a "limited war" was unrealistic. "There's nothing like limited war at least as far as these two neighbors are concerned with their nuclear armaments."
Fears of war sent shares tumbling in India and Pakistan. Indian shares slid to a three-month low, the rupee eased to within striking distance of its lifetime low against the dollar while government bond yields were close to five-month highs.
On Pakistan's Karachi Stock Exchange, shares plunged over seven percent as investors dumped bluechips.
(Additional reporting by Sugita Katyal and Hari Ramachandran in NEW DELHI and Ashok Pahalwan in JAMMU, India)
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