Leave has been cancelled for India troops
The foreign ministry in Beijing said it was very concerned by the current situation; India and Pakistan, it said, should solve their dispute through talks to prevent instability in South Asia.
India said China's calls should be aimed at Pakistan.
The United States, meanwhile, has stepped up pressure on Islamabad to shut down two groups blamed for the parliament attack by designating them foreign terrorist organisations under US law.
Water threat
India remains adamant that the ball is now in Pakistan's court.
"It is for Pakistan to take action against the terrorist outfits" operating from that country against India," a government spokeswoman in Delhi said.
China's call for calm came as India's Cabinet Committee on Security met to discuss further pressure on Pakistan, including a possible ban on Pakistan airline flights and cutting off a major water supply.
External Affairs Minister Jaswant Singh said the meeting would continue on Thursday because Defence Minister George Fernandes had been unable to return on Wednesday from a visit to Indian-administered Kashmir.
Mr Fernandes earlier told the BBC that Pakistan had declared war on India and something had to be done.
"When India is attacked in the way it was, frankly what Pakistan has done is wage war against India," he said.
Pakistan has arrested the leader of a Kashmiri militant for offences in Pakistan, and has asked India to provide further evidence.
But India says the arrest of Maulana Masood Azhar, although a step in the right direction, does not go far enough.
It wants Pakistan to hand over Kashmiri militants it claims were behind the attack on the parliament building in Delhi on 13 December.
The latest move by US Secretary of State Colin Powell freezes the assets the two groups might have in the United States and makes it illegal to support them financially.
"Today I am taking another important step in our campaign to eliminate the scourge of terrorism," he said.
Links severed
Despite the rising tensions, Delhi-based defence analyst and former Indian army major Maroof Raja told the BBC that India would not risk losing international support with military action.
But it could impose economic sanctions by abandoning a 30-year-old agreement which allows Pakistan access to water which passes through Indian territory.
"That is Pakistan's lifeline, so it would have a huge shock to Pakistan."
India, which has already severed diplomatic and transport links between the two countries, has ordered thousands of villagers to leave the disputed Kashmir region.
Both countries have moved extra soldiers to front-line positions and there has been more small-arms and mortar fire across the line of control in Kashmir.