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We hope that you will use your good relations (with Delhi) to convince India to agree to resolve the conflict in Kashmir
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President Musharraf, speaking to President Khatami
It is the first visit by an Iranian leader since the fall of the Taleban regime in neighbouring Afghanistan a year ago, and is viewed as a watershed in relations between the two states.
It is also President Khatami's first ever trip to Pakistan.
After receiving a red carpet welcome, the Iranian leader was whisked away from the airport in Islamabad for talks with Pakistani President Pervez Musharraf.
Mediation
President Khatami stressed on arrival that Iran and Pakistan should try to expand their relations in all fields.
However, the talks are expected to focus on the regional situation, particularly Iraq and tension between India and Pakistan.
President Musharraf asked Mr Khatami to mediate in the conflict over Kashmir.
"We hope that you will use your good relations (with Delhi) to convince India to agree to resolve the conflict in Kashmir," Mr Musharraf told his Iranian counterpart at a dinner on Monday.
Also on the agenda will be a $3.5bn oil pipeline that Iran wants to run from its oil fields through Pakistan and into India.
Officially, Iran and Pakistan have always described their relations as extremely cordial and brotherly.
But beneath the surface tension and mistrust remained in the past decade, mainly because of their divergent stand over the Taleban in Afghanistan.
Since Pakistan dumped the Taleban last year and joined the US-led military action to install a broad-based administration in Kabul, relations between Tehran and Islamabad have somewhat improved.
One factor that is still a cause of uneasiness is their opposite view on the growing American influence in the region.
US role
Pakistan is a close ally of the United States and has even provided bases for American troops to carry out military strikes in Afghanistan.
Iran, on the other hand, is one of the states regarded by President Bush as the "axis of evil".
Senior Foreign Ministry officials say the US role in the region, particularly the situation in Afghanistan, will be high on the agenda of discussions between the leaders of the two countries.
President Khatami is being accompanied by several top officials and the two countries are expected to sign a number of agreements to improve trade and commerce.
The pipeline is the key trade issue. Pakistan supports the project, but says improved relations with India would make it more feasible.