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NEW DELHI, Oct 25 (Reuters) - Indian Prime Minister Atal Behari Vajpayee accused Pakistan of being a terrorist state as his Hindu nationalist-led coalition marked three years in power with a huge political rally on Friday.

"Our neighbour is assuming the role of a terrorist state," Vajpayee told the rally attended by a parade of politicians from his National Democratic Alliance coalition.

"It does not hesitate to send fidayeen (suicide squads) into our country across the border to kill innocent women and children. We have to destroy this demon."

Vajpayee's strong words came a day after India said it had begun pulling back its soldiers from its border with Pakistan, ending the longest peacetime deployment in India's history after a 10-month military standoff.

The two countries massed nearly a million troops along their border after a deadly raid on India's parliament last December that New Delhi blamed on Pakistan-based militants fighting its rule in Muslim-majority Jammu and Kashmir.

Pakistan denies giving military support to the guerrillas, but says it gives moral and diplomatic backing to what it calls the freedom struggle of the Kashmiri people. 

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