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Tension along the Line of Control (LoC) has risen after India accused Pakistan of killing two soldiers and beheading one of them in a cross-border raid.
It is claimed that Pakistani troops crossed the ceasefire line near the town of Mendhar, in disputed Kashmir - the Muslim-majority state which lies at the crux of the Indo-Pakistani dispute.
According to senior Indian army officer Brigadier S. Chawla, the Pakistani soldiers then entered into a gun battle with a band of Indian troops, violating the terms of the ceasefire agreement between the two countries.
Two Indian troops were reportedly killed in the battle. Chawla added that one of the bodies was mutilated before the Pakistani soldiers fled.
An Indian army statement claimed: "Pak army troops, having taken advantage of thick fog & mist in the forested area, were moving towards our own posts when an alert area domination patrol spotted and engaged the intruders.
"The firefight between Pak and our own troops continued for approximately half an hour after which the intruders retreated back towards their side of Line of Control."
India is likely to warn Pakistan over the incident, while New Delhi has summoned the Pakistan High Commissioner to discuss the killing of its soldiers.
A spokesperson from the Indian Defence Ministry said: "The government of India considers the incident as a provocative action and we condemn it. The director-generals of military operations of the two countries are in touch over it.
"The government will take up the incident with the Pakistan government, we expect Islamabad to honour the ceasefire agreement strictly."
Indian Foreign Minister Salman Kurshid called the action "ghastly" and "unacceptable".
"This is inhuman. Extremely myopic by Pakistan. This is not how civilised people behave, especially a neighbour. Extremely distressing. We need answers from Pakistani side. We will take it up," Kurshid told CNN IBN
However the Pakistani government in Islamabad ridiculed the reports of a shoot-out as an "Indian allegation", and referred to another gun battle which took place just a few days ago.
The Pakistani government said: "This is Indian propaganda to divert attention from an Indian raid on Sunday on a Pakistani post in which a Pakistani soldier was killed."
The alleged ceasefire violation also comes shortly after the Pakistani Taliban vowed to Islamise India after capturing Kashmir.