India and Pakistan are preparing for the biggest liberalisation in bilateral trade since partition more than six decades ago, reviving commercial ties that have been strangled ever since the end of British rule in 1947.

Senior officials on both sides of the border say Pakistan's politicians and generals have softened their traditional insistence that expanded business links with India be conditional upon resolution of a bitter territorial dispute over divided Kashmir.

Hina Rabbani Khar, Pakistan's foreign minister, told the Financial Times that her government would press ahead with granting India 'Most Favoured Nation' status in an effort to break a long-standing deadlock in trade and investment that has hurt both economies. Details of the deal are expected to be agreed at a meeting of commerce secretaries in Delhi in November.

"In today's world it's not possible to not recommend freer trade to anyone," Mrs Khar said.

"One single country cannot emerge economically or politically as a powerhouse in a region that has conflicts that have been festering for years," she said. "It is in everybody's selfish interest to be able to resolve these conflicts."

Despite having a combined population that is bigger than China's, India and Pakistan's official bilateral trade is estimated at just $2.7bn with another $3bn in illicit flows, which are often routed through third countries in the Gulf. In contrast, Pakistan's bilateral trade with China during the last financial year (July-June) was $9bn.

India and Pakistan have agreed to a target of raising bilateral trade to $6bn within three years. Mrs Khar told parliament last week the 'Most Favoured Nation' status was agreed "in principle".

Earlier this month the countries' commerce ministers resumed talks suspended three years ago, after the Mumbai terrorist attack carried out by Pakistani militants.

The move by Pakistan to hold out the promise of improved trade terms comes only a week after New Delhi struck a high profile strategic partnership with Kabul, a move distrusted by many in Pakistan's security establishment who have long questioned India's intentions in Afghanistan.

Progress, however, remains vulnerable to militant attacks in India that often accompany peace initiatives between the two neighbours. While Mrs Khar said "forward movement" in dialogue with India had to be made "uninterruptible" by strong political commitment, she also warned of looming disagreements over shared water resources.

Pakistan's relations with the US have faced further strains in recent weeks since Admiral Mike Mullen, former chairman of the US joint chiefs of staff, accused Pakistan's Inter Services Intelligence of supporting attacks on US and Nato facilities by Pakistan-based Haqqani militants.

Mrs Khar, who was appointed in June, said Pakistan had been encouraged by India's acquiescence to preferential European Union market access for Pakistan after last year's devastating floods. She said Pakistan wanted to improve its regional connectivity with energy pipelines and roads, adding that "one day it would be possible" for Indian trade with central Asian nations to transit through Pakistan.

Visa restrictions that have long frustrated business leaders in both countries are also expected to be lifted in coming weeks.

The two countries' principal land crossing, at Wagha, is being modernised with the construction of a new freight handling facility. Cross border banking facilities are also planned to support greater trade across the Line of Control in Kashmir.

Indian officials and businessmen are encouraged by the prospect of improving trade ties, which has been strongly backed by Manmohan Singh, India's prime minister, and Narayana Murthy, founder of outsourcing group Infosys.

Azim Saigol, a Lahore-based industrialist, said the relaxation in restrictions would open new markets for Pakistan's cement, textiles and engineering industries: "It's very healthy. We are eying the Indian market and the Indians are eying our market. We will definitely benefit from the Indian market. We have lost our own market because the purchasing power of the people has been eroded."