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NEW DELHI, Dec 31 (AFP) - India welcomed on Monday Pakistan's arrest of a top separatist leader and other militants, in the first sign of a breakthrough in the military face-off that has brought the nuclear rivals to the brink of war.

"If this information is correct, this is certainly a step forward in the right direction," Foreign Minister Jaswant Singh told reporters after a meeting of India's cabinet committee on security.

Pakistan announced it had arrested the head of the Lashkar-e-Taiba and more than a dozen members of Lashkar and the Jaish-e-Mohammad -- the two Pakistan-based militant groups India has accused of carrying out the December 13 attack on its parliament in New Delhi.

More than 80 Islamic activists from a variety of groups have been detained, Pakistani officials say.

President George W. Bush on Monday praised President Pervez Musharraf's crackdown.

"He's cracking down hard, and I appreciate his efforts. Terror is terror and the fact that the Pakistani president is after the terrorists is a good sign," he said.

India had dismissed previous measures taken by Pakistan as "cosmetic" but Singh said international pressure, arising from evidence furnished by New Delhi, seemed to have borne fruit.

"As far as evidence of terrorist activities is concerned it has been provided in sufficent measure to the international community, and it is largely on that ground that Pakistan has now begun to act."

Singh said he hoped such steps would be "pursued vigorously" so "cross-border terrorism" could be eliminated.

It was the first recognition of progress to emerge from New Delhi since the parliament attack triggered the largest military build-up for 30 years.

The dangers of the military face-off were underlined Monday by a heavy exchange of mortar fire across the disputed Kashmir border that left two Indian soldiers dead and five seriously injured.

"This is the heaviest mortar shelling we have seen for four months," Brigadier P.C. Das told AFP.

And in an interview with the BBC, a spokesman for Musharraf warned that any Indian military strike against Pakistan would be regarded as an act of war.

"If India makes the mistake of launching an attack, air or ground, on anything on the land frontier, or violates the air frontier with Pakistan, Pakistan will respond in a reciprocal fashion," Major General Rashi Qureishi said. "Pakistan will consider that an act of war."

India said it was going ahead with its biggest military exercise in 15 years near the border with Pakistan.

The exercise, codenamed "Operation Chivalry", was orginally scheduled to begin after January 12 but had been brought forward, army spokesman Xavier Thomas told reporters.

"All units will participate in the exercises, which will shake the desert."

Indian Prime Minister Atal Behari Vajpayee called on Pakistan to shed its "anti-India" mentality and crush terrorist groups on its soil to allow a dialogue on all bilateral disputes, including Kashmir.

In a special article prepared for publication on New Year's Day, Vajpayee warned the Indian people to be prepared for any eventuality in the light of the "unprecedented" crisis.

"As I have said earlier, India does not want war. But we have a sovereign right to defend ourselves against cross-border terrorism, which is a proxy war that is already thrust on us," Vajpayee said.

"Pakistan will be solely responsible for the consequences of encouraging terrorism against India," he added.

India and Pakistan have fought three wars since gaining independence from Britain in 1947, twice over disputed Kashmir.

The current battle has mainly been fought on the diplomatic front, with India and Pakistan trading tit-for-tat sanctions, including a reciprocal ban on using each others' airspace.

At least 60,000 Indian villagers living near the Kashmir border have fled their homes in the past five days.

India said it had handed over a list of 20 wanted militants to Pakistan on Sunday night.

"They should be handed over to India for trial," Law Minister Arun Jaitley said, adding the prospect of war rested on Pakistan's response. 

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