The foreign ministers of Pakistan and Israel have for the first time held publicly acknowledged talks.
Reports say the talks follow a series of informal contacts
After the talks Pakistan's foreign minister said that his country had decided to "engage" with Israel after Israel's withdrawal from Gaza.
Israel's foreign minister described the talks, held in the Turkish city of Istanbul, as a "historic meeting".
Pakistan has emphasised that the meeting does not mean the recognition of the state of Israel.
"Pakistan attaches great importance to Israel ending its occupation of Gaza," Pakistani Foreign Minister Khurshid Kasuri said at a news conference after the talks.
"We see this development as the beginning of the process of [ending] Israeli occupation and establishing a Palestinian state living side by side with Israel in peace and security," he said.
Israeli Foreign Minister Silvan Shalom told Israel Radio: "We are talking about a tremendous significance, not just in regards to our relations with Pakistan, but the entire Muslim world."
Mr Shalom told reporters that he hoped the talks would lead to "a full diplomatic relationship with Pakistan as we would like it with all Muslim and Arab countries."
Before the meeting Pakistan's President Musharraf spoke to Palestinian President Mahmoud Abbas and to Saudi Arabia's King Abdullah. Both supported the move to hold talks, Pakistan says.
Meanwhile, the leader of the six-party alliance of Islamic parties in Pakistan told the BBC news website that the meeting went "against Pakistan's national interest as well as state policy."
Israel's Muslim World Relations
Qazi Hussain Ahmed, leader of the Muttahida Majlis-e-Amal (MMA), said "It goes against a policy that Pakistan has been pursuing from the very beginning."
Both sides played down the possibility of these talks leading immediately to Pakistan's recognition of Israel.
"It is premature to speak about establishing diplomatic relations, but it is definitely a step towards normalization of relations," the spokeswoman for the Israeli embassy, Sharon Bar-Li Saar, told AFP news agency.
A spokesman for Pakistan's foreign ministry said Pakistan will only recognise Israel when a state of Palestine has been created with Jerusalem as its capital.
Pakistan welcomed Israel's withdrawal from the Gaza strip
The talks between Mr Kasuri and Mr Shalom follow Israel's withdrawal from the Gaza strip last month.
Reports suggest the talks are the result of a series of informal contacts between the two countries.
"There have been contacts on different levels with Pakistani officials for several years," former Israeli ambassador to Washington Zalman Shoval told Associated Press.
The talks also follow the announcement that Pakistani President Musharraf will address a conference of the influential American Jewish Congress while in New York for the United Nations General Assembly in September.
Pakistan has previously linked the question of its recognition of Israel to the establishment of a Palestinian state.
But in July 2003 President Musharraf called for a national debate on the possibility of opening diplomatic ties with Israel.
The head of the governing Pakistan Muslim League party recently said the Arab world would benefit from Pakistan and Israel establishing relations.
Pakistan has never recognised the state of Israel, but its neighbour India opened diplomatic ties with Israel in 1992.
Since then, India and Israel have developed closer bilateral relations including significant levels of defence cooperation.
In March 2004 the two countries finalised a $1bn deal for the supply of three early warning radar systems to India.
At the time, analysts suggested that the sale had concerned India's regional rival Pakistan.
Turkey, host to Thursday's talks, is one of a handful of Muslim countries that have full diplomatic ties with Israel.