"Sisters and brothers, as you are aware, positive winds are blowing in India's external environment," Vajpayee told a conference of people of Indian origin.

He added: "The conclusion of a South Asian Free Trade Agreement will herald a new era of trade and economic co-operation in this region."

The free trade pact was sealed at a seven-nation South Asian summit, which included Vajpayee, that closed in Islamabad on Tuesday.

On the sidelines, India and Pakistan announced that they would restart dialogue from February.

"India-Pakistan relations show new signs of promise with a categorical assurance from Pakistan that it will not permit any territory under its control to be used by terrorists," Foreign Minister Yashwant Sinha told the meet.

India has accused Pakistan of arming and training Islamic rebels fighting since 1989 to end Indian rule in Kashmir.

But in the breakthrough announced this week, India said the dialogue with Pakistan would include discussions on Kashmir, which is divided between the two countries and claimed in full by both.

The last formal talks between India and Pakistan broke down in July 2001 at a summit in the Indian city of Agra.