India and Pakistan have agreed to resume direct air links from 1 January after a two year ban.
The announcement came after talks in Delhi
On Sunday, Pakistan said it would end a ban on Indian flights over its territory, in another sign of improving relations between the two neighbours.
President Pervez Musharraf said the move was a gesture of goodwill.
Indian airlines have suffered financially since the start of the ban as flights to Central Asia and Europe have to make a two-hour detour.
The announcement comes days after the nuclear-armed states agreed a ceasefire along the Line of Control (LoC) in disputed Kashmir.
Pakistani foreign office spokesman Masood Khan said the
agreement was a "significant watershed" in the peace process.
objective is to jump-start the stalled dialogue process," he told a news conference in Islamabad.
Delhi talks success
Indian and Pakistani aviation officials reached the agreement on restoring air links during a meeting in the Indian capital, Delhi.
"The two sides
agreed to resume simultaneous air links and overflights
with effect from 1 Jan, 2004 on a reciprocal basis," said a joint statement quoted by the Associated Press news agency.
India had linked the agreement on direct flights to the issue of opening up Pakistani airspace to Indian flights.
Eighteen months ago, India and Pakistan came close to all-out war over the Kashmir region.
Mr Musharraf said Pakistan was sincere in its efforts for peace in the region, and he hoped the thaw in relations between the two countries would lead to the resolution of all disputes between them.
But he stressed that Pakistan tied peace to "honour, dignity and sovereign equality".
The two countries severed air links after the December 2001 attack on India's parliament, blamed by Delhi on Pakistan-backed Kashmir separatists.
The direct Delhi-Lahore bus service resumed in July
But the two countries began a process of normalisation after Indian Prime Minister Atal Behari Vajpayee offered a symbolic hand of friendship to Pakistan in April.
Pakistan has invited Mr Vajpayee to a regional summit taking place in Islamabad next year.
Last week Mr Vajpayee said he would be "very pleased" if there was a meeting with his Pakistani counterpart.
But India has so far refused to resume talks on Kashmir, saying Pakistan must first stop training and arming militants who carry out attacks in Indian-administered Kashmir.
Pakistan denies the charge, saying it provides only moral and diplomatic support to those who oppose Indian rule in Kashmir.
The two countries have gone to war three times - twice over Kashmir - since gaining independence from British rule, and they fought a border conflict in Kashmir in 1999.