Work on a $6bn gas pipeline linking Iran, Pakistan and India will begin in the middle of 2007, officials say.
The 2,600km (1,620-mile) pipeline will boost India's supplies
Petroleum ministry officials from India and Pakistan made the announcement after a meeting of a joint working group in Islamabad.
The United States has expressed reservations over the purchase of natural gas from Iran, a country it accuses of supporting terrorism.
India and Pakistan have both rejected the concerns.
The petroleum ministry officials said they had made substantial progress and expected to finalise a tripartite framework agreement by December this year.
Pakistan's petroleum ministry secretary, Ahmed Waqar, said the two sides had discussed all aspects of the pipeline, including transit fees, security, and legal and commercial matters during two days of talks
Indian counterpart, Sushil Chand Tripathi, said the group would meet again in November in Delhi.
The sides issued a joint statement which said "discussions were conducted in an atmosphere of mutual understanding and co-operation".
The 2,600km (1,620-mile) pipeline will be a huge boost for energy-starved India.
India's energy demands, both in oil and gas, are expected to double by 2020 as the country's economy grows rapidly.
The world's second most populous country produces only half the natural gas it uses and currently imports 70% of the crude oil it needs.