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India summoned Pakistan's envoy in New Delhi to protest at the killing of two soldiers and the reported beheading of one of them in a border attack that has raised tensions in South Asia.

The two Indian soldiers died after a firefight erupted in disputed Kashmir around noon Tuesday as a patrol moving in fog discovered Pakistani troops about 500 metres (yards) inside Indian territory, according to the Indian army.

Pakistan denied that its troops had been involved in any such attack, saying that it had carried out its own investigation.

Promising that New Delhi's response would be "proportionate", Foreign Minister Salman Khurshid said that senior government and military officials would decide on Wednesday a course of action over the "ghastly" incident.

In a first step, his ministry summoned Pakistani's High Commissioner (ambassador) Salman Bashir to lodge a complaint about the clash, which has dealt a blow to peace efforts between the nuclear-armed neighbours.

After the lunchtime meeting, the foreign ministry said in a statement that Pakistan "should immediately investigate these actions that are in contravention of all norms of international conduct".

Indian authorities said the body of one of the soldiers was "badly mutilated," while newspapers and a military source speaking to AFP indicated that he had been decapitated.

The bodies of both men have been brought to an army hospital in Rajouri in northern India where a post-mortem will confirm the extent of their injuries, army spokesman Rajesh Kalia told AFP.

"Pakistan army's action is highly provocative. The way they treated the dead body of the soldiers, Indian soldiers, is inhuman," Defence Minister A.K. Antony told reporters on Wednesday.

But a Pakistani military official accused India of spreading "propaganda" to divert attention from a raid on Sunday in which Islamabad says one of its soldiers was killed by Indian troops.

"Pakistan rejected Indian army allegations of cross LoC (Line of Control) firing by Pakistani troops and killing any Indian soldier," an unnamed official said in a statement.

"Indian authorities were informed that Pakistan has carried out ground verification and checked and found nothing of this sort happened as being alleged by India."

Khurshid said the attack was designed to "derail" an already fragile peace process. Relations had been slowly improving following a rupture after the 2008 attacks on Mumbai, which India blamed on Pakistan-based militants.

Steps such as opening up trade and offering more lenient visa regimes have been a feature of recent high-level talks.

Observers said a freeze on high-level dialogue would be among the options for the Indian government that fall short of a military response.

"The minimum India can do is to summon the Pakistani ambassador," former Indian foreign secretary Lalit Mansingh told AFP.

"Functional dialogue like trade negotiations and so on should continue, because it is in India's interest, but we should suspend high-profile dialogue... until we get a satisfactory response from Pakistan."

Newspaper headlines stoked the tensions, with the Mail Today denouncing "Pak Army Butchers" while the Hindustan Times reported the second soldier had his throat slit.

The clash took place in Mendhar sector, 173 kilometres (107 miles) west of the city of Jammu, the winter capital of the state.

Army sources said there had been further exchanges along the de facto border on Tuesday night which caused no damage and the border was calm on Wednesday.

"The Line of Control is steady and stable," Brigadier G. S. Sangha, one of the army's most senior officers in Kashmir, told AFP.

A ceasefire has been in place since 2003 along the Line of Control in Kashmir that has divided the countries, but it is periodically violated by both sides.

Muslim-majority Kashmir is a Himalayan region that India and Pakistan both claim in full but rule in part. It was the cause of two of their three wars since independence from Britain in 1947.

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