Three masked men are said to have approached him and opened fire.

The gunmen have not yet been identified and no one has admitted carrying out the attack.

Mr Lone was taken to a hospital in Srinagar, but was found to be dead on arrival, reports say.

The BBC's Altaf Hussain in Srinagar says the killing appears to have derailed an expected peace initiative by Mr Vajpayee.

Mr Lone was seen as a moderate who wanted talks with the Indian Government over his demands for a separate Kashmir state.

Indian Kashmir's Chief Minister, Farooq Abdullah said the attack was the work of the government in Islamabad.

"Whoever wants a peaceful solution in Kashmir is killed by Pakistan," he said, the AFP news agency reports.

But the Pakistan Government was quick to condemn the attack, describing his murder as a setback to the peace process.

Three militant groups in the area have blamed the attack on the Indian secret services.

Heavy shelling

Tensions between India and Pakistan have soared since more than 30 people were killed in an attack on an army camp near Jammu last week, which India blamed on Pakistan-based militants.

Heavy shelling between the two sides over their border in Kashmir continued for a fifth straight day on Tuesday.

At least three civilians were killed and seven injured in the latest exchanges, an Indian army spokesman said.

Pakistani police said a 10-year-old had died in the firing.

Shares on the stock exchange in Bombay have fallen sharply, in expectation of hostilities breaking out.

Karachi had its biggest daily fall in nearly four years on Monday.

War of words

Pakistan has urged the international community to "convince India to see reason", and appealed for talks with Delhi to defuse the situation.

Several countries, especially the United States, are worried about the conflict escalating out of control, and have urged both sides to exercise restraint.

The British Government has launched a diplomatic initiative sending Foreign Secretary Jack Straw to the region next week.

"The international community is watching events with mounting concern. This is a crisis the world cannot ignore", Mr Straw said in London.

The US is also sending Deputy Secretary of State Richard Armitage to India and Pakistan, although no date has been set.