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KATHMANDU, Jan 3 (AFP) - South Asian foreign ministers were due to open a second day of talks Thursday ahead of a summit in Nepal, but signs of dialogue between India and Pakistan were overshadowed by fresh threats between the nuclear rivals and further violence.

The Indian and Pakistani foreign ministers were reported to have shaken hands and exchanged pleasantries Wednesday in the countries' highest-level contact since an attack last month on India's parliament, even as another assault by suspected Muslim militants hit the legislature in Indian Kashmir.

Ministers from the seven-member South Asian Association for Regional Cooperation (SAARC) were to hold more general discussions Thursday, one day before the opening of a summit to be attended by Indian Prime Minister Atal Behari Vajpayee and Pakistani President Pervez Musharraf.

Vajpayee has ruled out any bilateral summit with Musharraf in Kathmandu and Wednesday lashed out at what he termed Pakistani support of terrorism.

"You can't fight terrorism in Afghanistan and spread it in Kashmir. This can't go on," Vajpayee told a conference of mayors in his hometown Lucknow, capital of the politically crucial state of Uttar Pradesh.

"You can't see terrorism in two ways, it can't be seen in pieces, it has to be seen in totality."

India has been demanding Pakistan crack down on two Islamic militant groups it blames for the parliament attack and has withdrawn its ambassador from Islamabad and severed rail and bus links with its western neighbor to drive home the point.

Pakistan, also under pressure from Washington, has detained members of the two groups, Lashkar-e-Taiba and Jaish-e-Mohammad. Amid a troop buildup on the nuclear states' border, Musharraf warned India on Wednesday against any military action.

"Pakistan wants peace and de-escalation but should a mistake of attacking Pakistan be made they would regret their decision," Musharraf told a joint meeting of the National Security Council and the cabinet.

But witnesses said Indian Foreign Minister Jaswant Singh and his Pakistani counterpart, Abdul Sattar, greeted each other warmly in Kathmandu on Wednesday, with Singh extending his hand.

"It was very cordial, no hestitation whatsoever," Sri Lanka's Foreign Minister Tyronne Fernando said. "I would say this is the breaking of the ice."

Fernando said the smaller countries of SAARC -- overshadowed by the two ever-hostile giants since the regional bloc's inception in 1985 -- were deeply concerned over escalating Indian-Pakistani tension.

In another incident sure to aggravate the situation, suspected Muslim separatists threw grenades Wednesday near the main gate of the legislature in Srinagar, Indian-administered Kashmir's summer capital, killing a policeman and injuring 17.

An attack on the assembly on October 1 that killed 38 people set off passions among Indian hawks, some of whom advocated bombing Pakistani territory in the same way the United States launched its Afghanistan campaign after the September 11 assault on New York and Washington.

India accuses Pakistan of training and funding militants fighting to end New Delhi's rule in Kashmir. Islamabad says it only supports an indigenous movement for self-determination in India's only Muslim-majority state.

The Kashmir dispute doomed a July summit between Musharraf and Vajpayee in the Taj Mahal city of Agra. The Indian premier refused to see the Pakistani general when the two were in New York last month for the United Nations General Assembly.

While terrorism is set to be an agenda topic at the Kathmandu summit, the seven SAARC countries -- which form one-fifth of the world's population and its most impoverished region, are also due to discuss a host of other issues, including expanding intra-bloc trade and curbing the sexual exploitation of women and children.

In his opening remarks Wednesday, Nepalese Finance Minister Ram Sharan Mahat made no mention of Indian-Pakistani tensions, calling instead for the seven countries to tackle poverty and "take decisive forward movement in a collective way to keep pace with the rest of the world."

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