India and Pakistan have reached a "broad understanding" on a framework for peace talks, Pakistan says.
The first day of talks was described as "cordial and constructive"
The Foreign Ministry in Islamabad said the agreement would be formalised on Wednesday during a meeting between the two nations' foreign secretaries.
The news came after a second day of discussions between the nuclear rivals in the Pakistani capital - their first formal talks for nearly three years.
The landmark talks are part of efforts to resolve issues such as Kashmir.
Both sides said the first day of talks was "cordial and constructive".
BBC correspondent Zaffar Abbas in Islamabad says neither side gave details of the proposed framework, possibly so they would not raise public expectations at this stage.
In the past, moves to discuss Kashmir - the most serious of all the disputes - at the very start of talks has proved a non-starter, our correspondent says.
Meanwhile, police in Indian-administered Kashmir say suspected Muslim militants have killed a second official of the state's main governing party in less then 24 hours.
And near Srinagar more than 4,000 people protested at the killing of a civilian, allegedly by pro-India militiamen.
Tens of thousands of people have died in the disputed territory since militants took up arms against Indian rule in 1989.
India and Pakistan have fought two wars over Kashmir since independence in 1947, but a ceasefire is now in effect.
'War not an option'
The talks in Islamabad - involving relatively junior officials at this stage - are designed to pave the way for full peace negotiations between the nuclear rivals.
Officials say the two sides have agreed to take up all outstanding issues simultaneously and try to resolve some of the relatively minor disputes before moving on to the more complicated issue of Kashmir.
Some separatists have been protesting against the talks
Speaking after the first day of talks on Monday, Pakistan Foreign Ministry spokesman Masood Khan said the two sides realised war was not an option.
"You have to look at ways to find a peaceful resolution of the outstanding disputes between the two countries," he told reporters in Islamabad.
In Delhi, Indian Foreign Ministry spokesman Navtej Sarna confirmed that officials were focusing on working out a timetable and framework for discussions.
He announced that India was freeing eight Pakistani civilians, four of them boys, who had been held after straying across the border.
Observers believe India and Pakistan have come to the dialogue with a new recognition that the conflict in Kashmir cannot be won by military means.
The Islamabad meetings are the culmination of a thaw which began last April.
The decision to hold talks was announced when Pakistani President Pervez Musharraf and Indian Prime Minister Atal Behari Vajpayee met on the fringes of a regional summit in Islamabad last month.
A number of confidence-building measures have been introduced over the past eight months, including a resumption of rail, air and bus links and a strengthening of diplomatic ties.
At the weekend, India confirmed its cricketers would tour Pakistan in March, despite security concerns.