The arch-rivals also touched on their long running dispute over the divided Himalayan state of Kashmir during a bilateral meeting on the sidelines of the seven-nation summit being held in the Bangladeshi capital.

Pakistani Prime Minister Shaukat Aziz told the South Asian Association for Regional Cooperation (SAARC) summit it was time ome to recognise the impact conflicts had on the region's economies.

"As we look at the 20 years of SAARC, we cannot escape the conclusion that South Asia lags behind its larger Asian neighbourhood in terms of economic and social advancement," he said.

"We have remained embroiled with conflict management. We need to move towards conflict resolution."

The leaders of Bangladesh, Bhutan, India, the Maldives, Nepal, Pakistan, and Sri Lanka were in Dhaka for the two-day summit.

The meeting marks the 20th anniversary of the grouping set up to promote economic cooperation and reduce poverty in the region which is home to half the world's poor where the World Bank says 40 percent live on less than a dollar a day.

Critics say squabbling between member nations has hampered SAARC's ability to deliver results for south Asia's 1.4 billion people.

Muslim-majority Kashmir has been split between India and Pakistan since independence from Britain in 1947, causing two of the three wars between the now nuclear-armed neighbours.

A dialogue was launched in January 2004 to remove deep-seated mistrust.

India and Pakistan did not appear to have made any signficant progress in their slow-moving peace process as a result of the Saturday evening meeting.

The leaders of the two countries did, however, discusse a range of bilateral issues, said Pakistan foreign ministry spokeswoman Tasnim Aslam.

Earlier, Prime Minister Manmohan Singh told the inaugural session "it is only in the environment of mutual confidence and a collective commitment against the scourge of terrorism that we can register the progress we desire in more intense interaction".

"There is an imperative need to change and overcome the divisions of history and politics to forge a new architecture of mutually beneficial economic partnership," he said.

Analysts said earlier they did not expect any breakthrough at the bilateral meeting partly due to the absence of Pakistan President Pervez Musharraf.

SAARC leaders also called for greater regional cooperation to deal with the aftermath of natural disasters like the Kashmir earthquake that killed more than 74,000 people and last year's devastating tsunami that claimed more than 47,000 lives in Sri Lanka, the Maldives and India.

The summit is due to approve the setting up of a disaster preparedness centre in the Indian capital New Delhi, which would also seek to give advance warnings on cyclones and floods that regularly bring massive loss of life.

The Dhaka meeting was also expected to lead to an agreement on the implementation of a previously approved South Asian free trade agreement, as well as trans-national strategies for combating terrorism.

More than 30,000 troops have been deployed for the summit in Dhaka, where two series of small bomb blasts blamed on Islamic militants in August and October killed five people and wounded dozens.

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