South Asian leaders wrapped up their first summit in two years Tuesday, a gathering that saw the first talks between nuclear-armed rivals India and Pakistan since 2001 and raised hopes for greater regional cooperation.

The seven-nation South Asian Association for Regional Cooperation (SAARC) agreed to launch a free-trade area from 2006, to draw up a social charter for its 1.4 billion people and to fight terrorism.

Pakistani President Pervez Musharraf (R) and Indian Prime Minister Atal Behari Vajpayee shake hands before meeting on the sidelines of the South Asian Association for Regional Cooperation (SAARC) summit in Islamabad, January 5, 2004. [Reuters]

In a show of unity at the concluding session of the three-day summit, foreign ministers linked hands after signing the three documents while their leaders looked on and applauded.

But the success of moves toward SAARC's aim of greater integration hinges on peace between India and Pakistan, its biggest members.

Officials have declined to give details of Monday's ground-breaking talks between Indian Prime Minister Atal Behari Vajpayee and Pakistani President Pervez Musharraf, or to say whether they had made any progress toward resolving their decades-old dispute over Kashmir, the heart of their rivalry.

But diplomats said the Vajpayee-Musharraf meeting was in itself a step forward in the slow process of rebuilding relations.

Pakistan said "detailed discussions" with India had taken place in a good atmosphere and both sides said the leaders were keen to keep the momentum going to repair relations.

Two years ago, the neighbors, who have fought three wars since independence from Britain in 1947, came to the brink of another war over Kashmir after an attack on the parliament in New Delhi that India blamed on Pakistan-backed militants.

Ties have gradually improved since April when the 79-year-old Vajpayee launched what he called a final bid for peace in his lifetime.

In November, Pakistan announced a cease-fire along the front line in Kashmir, but violence between security forces and Muslim rebels has continued on the Indian side, which India accuses Pakistan of fomenting.

Pakistan denies helping the rebels and accuses Indian security forces of widespread human rights abuses in Kashmir.

RISK FROM HAWKS

Past attempts to make peace have often failed under the weight of overblown expectations, or because they were sabotaged by hawks on both sides. It remains unclear whether the talks have taken the two sides any closer on the issue of Kashmir.

Diplomats say both Vajpayee and Musharraf appear keen to move forward, but it was not clear if they would find any middle ground.

Vajpayee called for continuous contacts between the neighbors, but cautioned that it would take a long time to resolve their disputes.

The framework agreement to reduce or eliminate tariffs is the most tangible development to come out of the summit, but it will depend on better India-Pakistan relations.

Pakistan's Prime Minister Zafarullah Khan Jamali acknowledged that in his closing address to the meeting

"We have succeeded in reintegrating regional cooperation. We have made good progress on South Asia preferential tariff arrangements and a South Asia free trade area. These are watershed developments," he said.

But he added: "Peace and stability are an essential prerequisite to address the multifarious challenges of socio-economic development."

Under the trade pact, SAARC's developing states -- Pakistan, India and Sri Lanka -- will cut tariffs to between zero and five percent within seven years of the start of the agreement.

Its least developed states -- Bangladesh, Nepal, Bhutan and the Maldives -- have 10 years to complete the process, though all members can maintain a list of sensitive products on which tariffs will not be reduced.

SAARC's population makes up about a fifth of humanity, but most of their trade is done outside the region.

Business leaders say Pakistan and India's $1.5 billion trade through unofficial channels and third countries could double with a trade deal and better relations.

But there are concerns about dismantling trade barriers that would allow cheap Indian goods to flood markets and analysts say it is far from clear that the pact can be implemented.

While a South Asian Preferential Trading Arrangement has existed since December 1995, its usefulness has been limited, with regional trade averaging just about $3.0 billion, or less than five percent of SAARC members' global trade.

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