The comments, made at a meeting of Pakistani military chiefs, come as the South Asian neighbours finalise dates for a meeting between Musharraf and Indian Prime Minister Manmohan Singh later this year.

India and Pakistan have fought three wars since independence six decades ago, but in January 2004 they embarked on a peace process focused on their dispute over the Himalayan territory of Kashmir.

"Relations between Pakistan and India have never been better," a statement quoted General Musharraf as telling a conference of commanders in the garrison city of Rawalpindi, near Islamabad, on Monday.

"There is positive movement in resolution of issues of conflict, especially Kashmir," Musharraf said, adding however that Pakistan's national interests "will not be lost sight of."

Military ruler Musharraf added that there had been an increase in economic activity with India and that "confidence-building measures" had boosted cultural and sporting ties.

Musharraf also discussed Pakistan's role as a key US ally following recent criticism by Western nations and Afghanistan, saying that it was "a frontline state in (the) war against international terrorism and has done the maximum."

He said that internal threats from religious extremism -- including a mosque in the capital trying to enforce a Taliban-style justice system -- were the "greatest challenge to the integrity of the country."

The comments on India are among Musharraf's most positive since he seized power in a bloodless coup in 1999.

Commentators said it was significant that he made them to his power base in the military and that he may have been trying to emphasise achievements in the peace process after a difficult few months at home.

"It is very significant that he chose to highlight improving ties with India and Kashmir at a time when he faces a multitude of internal problems and pressure from the international coalition in the fight against terrorism," said Najam Sethi, editor of English language newspaper the Daily Times.

"He is in trouble domestically and he still chose to speak about improving ties with India."

However, the tensions that remain on the subcontinent were underscored on Monday when India's defence minister accused Pakistan of continuing to support cross-border terrorism in Indian-administered Kashmir.

Pakistan denies the charge.

The two countries made no headway at a meeting in Islamabad earlier this month on a possible withdrawal from the mountainous Siachen glacier in Kashmir, dubbed the world's highest battlefield.

Mainly Muslim Pakistan and Hindu-majority India each hold part of Kashmir and claim it in its entirety. The region has sparked two of their major wars and a number of smaller conflicts.

Tensions also flared last year after India accused Pakistan's spy service of involvement in train bombings in Mumbai that killed 186 people.

However, both sides remained calm in February when 68 people died in the firebombing of a Pakistan-bound train in northern India.

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