Indian Prime Minister Manmohan Singh has said on a visit to Kashmir that Delhi will not accept any redrawing of borders in the disputed region.
Indian troops pull out - but it is not known how many will follow
The proposal was part of an initiative for a solution set out by Pakistani President Pervez Musharraf last month.
Mr Singh's visit came as India began a partial troop pullout from its section of Kashmir, citing improved security.
The prime minister addressed a crowd of about 8,000 in Srinagar, unveiling a new $5bn development package.
He also said his government was ready for talks with any group that rejected violence.
India and Pakistan have fought two wars over their rival claims to Kashmir, which was split during the creation of Pakistan in 1947.
More than 40,000 people have died in the region since an armed insurgency began in 1989.
Mr Singh said after the Srinagar rally that India was prepared to look at President Musharraf's other proposals, but added that they were still not clear.
However, he said: "I have made it clear to President Musharraf that any redrawing of the international border is not acceptable to us. Any proposal which smacks of further division is not going to be acceptable to us."
India would like to see the Line of Control that currently divides the region become an accepted international boundary, while Pakistan, and Kashmiri activists, reject this.
They argue that the majority-Muslim Kashmir Valley should not stay part of India.
Mr Singh's rejection of boundary changes is therefore not surprising. But the BBC's Dan Isaacs points out that current discussions about Kashmir are the result of thawing relations between India and Pakistan that have prompted a search for new solutions.
Pakistan's President Musharraf listed several options for a settlement last month.
They included making the whole area demilitarised and autonomous, putting it under the joint control of the two countries or dividing some parts between the two countries.
On arriving in Kashmir, Mr Singh said he had been able to order a troop withdrawal because of the improvement in the security situation in Kashmir.
A first unit of about 1,000 soldiers was seen withdrawing from the southern town of Anantnag early on Wednesday, witnesses said.
It remains unclear how many soldiers India plans to pull out. Further withdrawals would depend on reduced militant activity by separatists, Mr Singh said.
He appeared at a stadium in Srinagar to deliver a speech from behind a bullet-proof screen, erected to prevent separatist attacks.
Mr Singh announced a four-year development package including two power projects, investment in education and plans to upgrade Srinagar airport.
The BBC's Altaf Hussain in Srinagar says a number of people in the crowd were shouting slogans demanding jobs before peace.
He says many Kashmiris recall a huge economic package promised by Prime Minister Rajiv Gandhi 20 years ago that never materialised.
Mr Singh said the new package was expected to create 24,000 new jobs, including 14,000 for women.
Mr Singh says he is taking a risk by pulling troops out of the region, but that it is a calculated one.
Pakistan's foreign ministry spokesman, Masood Khan, welcomed the move, saying he hoped it would promote respect for human rights in Indian-administered Kashmir.
But the United Jihad Council, an alliance of several militant groups fighting to end Indian rule in Kashmir, said the withdrawal was an attempt to cover up repression.
India is estimated to have between 180,000 to 350,000 soldiers in the state.
India and Pakistan have embarked on a peace process to try to resolve all their outstanding differences, including those over Kashmir.
The process continues next week when Pakistani Prime Minister Shaukat Aziz makes his first visit to India.