HIGHLIGHTS: New Delhi Says More Steps to Come||Cross Border Shelling Continues Despite Diplomatic Thaw Ahead of Rumsfeld's arrival in South Asia||Markets Rally on Good News|| STORY: India took its first step Monday to ease a six-month military standoff with Pakistan over Kashmir, reopening its airspace to Pakistani over flights and promising more measures could follow. (Read photo caption)

A foreign ministry spokeswoman, Nirupama Rao, said New Delhi would announce further steps if Pakistan President Pervez Musharraf made good on a pledge of firm action against Islamic militants India blames for attacks on Indian targets.

"Our response to these measures will be sequenced. Today's announcement should be seen as an indication of our continued monitoring of the situation, our desire for peace, because to peace there is no alternative," Rao told a news conference.

Pakistan welcomed the announcement -- made ahead of a peace mission to the region by Defense Secretary Donald Rumsfeld this week -- but said further action had to follow.

"This is a step in the desired direction, but a lot more needs to be done," Pakistan's Foreign Ministry spokesman Aziz Ahmed Khan said. "I would emphasize the most important thing is that the process of dialogue should commence."

Despite the incipient diplomatic thaw, Indian and Pakistani troops continued to trade fire in disputed Kashmir. Five people, four of them civilians, were reported killed in fresh artillery and mortar bomb exchanges at several points along the Line of Control dividing the region, including on the 20,000-foot Siachen glacier, dubbed the world's highest battlefield.

MARKETS RALLY

Financial markets rose in both countries on hopes of a breakthrough. The benchmark Karachi Stock Exchange 100-share index closed up 5.94 percent while the 30-issue Bombay Stock Exchange index ended up 1.92 percent.

The threat of war has brought a string of high-level officials to the region in a U.S.-led peace push.

U.S. Deputy Secretary of State Richard Armitage held talks in Pakistan and India last week, with Rumsfeld expected to arrive in New Delhi late Tuesday before heading for Islamabad.

"If India makes some gestures toward military and diplomatic de-escalation by then, Mr. Rumsfeld is expected to press General Pervez Musharraf for additional steps on cross-border terrorism, such as dismantling the camps," Indian defense specialist C. Raja Mohan wrote in The Hindu newspaper.

NO TROOP PULLBACK SEEN

Musharraf has promised to stop Islamic militants crossing into Indian Kashmir to join a revolt against Indian rule and to curb their operations inside Pakistan and Pakistan-administered Kashmir.

India has said it will not pull back its army from the border until it is convinced the action against militants is permanent and their training camps are dismantled.

Musharraf earlier told reporters that Pakistan would study any steps taken by India, but the risk of war remained.

"As long as the forces remain deployed...the danger is not over," Musharraf said at Islamabad airport before leaving for the United Arab Emirates.

Most analysts do not expect India to pull its army back from the border before state elections due in Kashmir in September or October, which New Delhi sees as a key step in ending a 12-year revolt against its rule there.

Many separatists oppose elections, which they say have been rigged in the past and which they see as India's way of trying to legitimize its rule in the mainly Muslim Himalayan region.

PHOTO CAPTION

An Indian commando stands guard in front of a government building in Calcutta on June 10, 2002. Firing across the ceasefire line in Kashmir has continued despite signs that tensions have eased between India and Pakistan ahead of a visit this week by Defense Secretary Donald Rumsfeld. (Jayanta Shaw/Reuters)