HIGHLIGHTS: India Reportedly Withdraws 3 Strike Divisions from the Pakistan Frontier But Claims Right over All Disputed Region of Kashmir & Demands Pakistan Be Declared 'Terrorist State'||New Delhi Gives Credit to Musharraf for the Significant Reduction in Cross-border Infiltratation By Armed Kashmiri Nationalists||India Announces Talks with the Government of Indian-ruled Kashmir on Devolution of Greater Power|| STORY: In what could be a significant reduction of war readiness, the Indian army has withdrawn three strike divisions - about 18,000 men - from the Pakistan frontier, high-ranking army and government officials said Tuesday. (Read photo caption

The Defense Ministry denied the movements, however, and India's deputy prime minister made a bellicose speech to Parliament, claiming India's right to all of the disputed region of Kashmir and demanding that Pakistan be declared a 'terrorist state'.

The mixed signals were indicative of the political sensitivity of de-escalation and the tough task awaiting U.S. Secretary of State Colin Powell and British Foreign Secretary Jack Straw when they visit the nuclear-armed South Asian neighbors later this month to nudge them toward dialogue.

The Indian army withdrew the three strike divisions a week ago, before an attack on Saturday by suspected Islamic militants that killed 28 people in Jammu, the winter capital of the Indian-ruled northern Jammu-Kashmir state.

The strike divisions - army units that are trained to push forward in case of war or make cross-border attacks on militants - were removed after a study confirmed that the infiltration of militants from Pakistani territory had significantly diminished, the officials told the AP.

In New Delhi, the Defense Ministry denied the report.

But the officials, who have given reliable information about such movements in the past, said the government had not planned to make its troop withdrawal public.

In Islamabad, Pakistani government spokesman Maj. Gen. Rashid Quereshi said he had no confirmation of the Indian withdrawal and therefore no comment.

Meanwhile, India's federal government announced that former law minister Arun Jaitley would would conduct talks with the government of Jammu-Kashmir - India's only majority Muslim state - on the devolution of greater power. Jammu-Kashmir occupies a special constitutional position among Indian states.

PHOTO CAPTION

Indian Prime Minister Atal Bihari Vajpayee, right, and Home Minister L.K. Advani greet dignitaries at the swearing in ceremony of the new cabinet in New Delhi Monday, July 1, 2002. India's finance minister and foreign minister swapped jobs Monday in a midterm Cabinet shuffle apparently aimed at strengthening the governing coalition and party before state elections next year. External Affairs Minister Jaswant Singh, who has been a prominent voice for the Indian government during the last six months of near-war tensions with neighboring Pakistan, was named finance minister. (AP Photo/Ajit Kumar)