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NEW DELHI, Nov 25 (AFP) - Indian Prime Minister Atal Behari Vajpayee and Pakistani President Pervez Musharraf are set to meet in Kathmandu early next year, which could break a deadlock since the failed summit in July between the two South Asian neighbours.

On Saturday, Vajpayee said he was prepared to meet Musharraf on the sidelines of a South Asian summit in the Nepalese capital of Kathmandu between January 4 and 6.

In Islamabad, Pakistani government spokesman Anwar Mahmood described Vajpayee's comments as a positive step and said the military regime was ready for such a meeting between the two leaders.

The upcoming summit of the South Asian Association of Regional Cooperation (SAARC) was set for December 1999, but was delayed due to squabbling between India and Pakistan.

SAARC organisers are keeping their fingers crossed following Saturday's attacks by Nepalese Maoist guerrillas which left at least 40 policemen, soldiers and civilians dead in the Himalayan kingdom.

Besides India and Pakistan, the other five SAARC member nations --- Bangladesh, Bhutan, Nepal, the Maldives and Sri Lanka --- are eagerly awaiting the possible meeting between Vajpayee and Musharraf, analysts said.

The pair have not met since the historic summit in July collapsed over the disputed region of Kashmir when they failed to cobble together a joint declaration aimed at opening a new door for diplomacy.

Vajpayee had refused to meet Musharraf in New York earlier this month on the sidelines of a United Nations General Assembly session, saying Islamabad must halt its support for "cross-border terrorism" in Kashmir.

Pakistan denies the Indian allegation but offers moral and diplomatic support to what it argues is the Kashmiris' just struggle for self-rule. The armed insurgency has left more than 35,000 people dead in the Muslim-majority region since 1989.

Earlier Sunday, former Pakistani premier Benazir Bhutto welcomed the expected meeting, but expressed doubts over how much legitimacy it would have in Pakistan.

"It is always good when people meet. I am a firm believer in communication," Bhutto said at the start of a private trip to India.

But "my only concern is that General Musharraf is an unelected leader in Islamabad and it is important for the relationship between India and Pakistan that they be conducted at a level where people of Pakistan are carried along," Bhutto said.

If the meeting between the pair takes place, it will be in a new global environment and both of them would need to measure their responses accordingly, analysts said Sunday.

They said the September 11 attacks in the United States and the US-led strikes in Afghanistan have seen South Asia emerging as a global hotspot, where India and Pakistan's role has increased dramatically in importance.

Both are partners in the US-led coalition against terrorism but each is demanding that the campaign be expanded to include their complaints over Kashmir.

Anxious to keep the two estranged South Asian neighbours on board the coalition, US officials have repeatedly pressed Islamabad and New Delhi for calm.

The year's most intense firefight on Kashmir's border erupted in October on the eve of a visit to the region by US Secretary of State Colin Powell, sparking new worries in Washington.

A train of leaders from Europe who visited South Asia in the past two months too have urged Vajpayee and Musharraf to break ice and open ways to resume their stalled dialogue. 

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