Troops have been moved up both sides of the border
India says two Pakistan-based militant groups, Lashkar-e-Toiba and Jaish-e-Mohammad, were behind the attacks and has called on the government in Islamabad to take action against them.
Pakistan has placed the head of Jaish-e-Mohammad, Maulana Masood Azhar, under house arrest in the central province of Punjab.
The Indian prime minister, Atal Behari Vajpayee, said Delhi did not want war, but war was being thrust upon it and the country would have to face it.
Pakistan's military leader, President Pervez Musharraf, said the army was fully prepared for all challenges, but the country would have to proceed cautiously, because of its nuclear capability.
Exchange of fire
Overnight the two sides exchanged mortar fire for the second night running in the Jammu region of Kashmir.
Two Indian soldiers were reported to have been killed in the fighting, although this has not been independently confirmed.
Border skirmishes are frequent in Kashmir, though they have become more volatile since the Indian parliament attack.
Indian Army officials said more than 2,000 villagers had been moved to safety from south of Jammu, the winter capital of Jammu-Kashmir
India has also cancelled all military leave and moved thousands of soldiers and tanks into the border state of Rajasthan, according to reports from the region.
Pakistan has deployed anti-aircraft guns and transported troops from an eastern garrison town to its border with India, local sources told the Reuters news agency.
The Indian Army said its mortar fire had destroyed eight Pakistani bunkers in the Galahar sector, although Pakistan denied the claims.
'Highly explosive'
The situation was described by one senior Pakistani army officer as "highly explosive".
The BBC's Adam Mynott says that diplomatic moves are continuing, and India is also thought to be considering taking economic measures against Pakistan.
He says Kashmir continues to provide a fertile recruiting ground for militants, and what was originally a political separatist struggle is now attracting Pakistani and Afghan fighters motivated by religious convictions.
Delhi has recalled its high commissioner, Vijay Nambiar, from Pakistan and severed transport links between the two countries - moves described by Pakistan's President Musharraf as arrogant.
On Sunday, Pakistan also accused India of kidnapping and torturing a staff member of its High Commission in Delhi, which India has strongly denied.
The staffer, Mohammad Sharif Khan, was expelled from India on Monday for "engaging in activities beyond his legitimate sphere of activity".