In the highest level talks between New Delhi and Islamabad in over a year, Pakistan Premier Yousuf Raza Gilani agreed to look into allegations his spy service was behind last month's suicide bombing of India's embassy in Kabul.

US Assistant Secretary of State for South and Central Asian Affairs, Richard Boucher, who is attending the summit as an observer, said he believed Gilani was determined to "conquer the problems of extremism and terrorism."

"We welcome the statement he made about looking into the causes and sources of the Kabul bombing," Boucher told reporters, adding that Pakistan's new government needed more time to tackle terrorism.

"I do remember it's a new government. There are enormous challenges," he told reporters on the sidelines of the eight-member South Asian Association for Regional Cooperation (SAARC) summit in the Sri Lankan capital.

On Saturday the Indian and Pakistan premiers agreed that the bombing of India's embassy in the Afghan capital, plus a string of clashes along the Line of Control dividing the Himalayan region of Kashmir, had "cast a pall" on the four-year-old peace drive, Indian foreign secretary Shiv Shankar Menon said.

Indian Prime Minister Manmohan Singh, who met Gilani at a luxury hotel overlooking the Indian Ocean, "was relatively frank in expressing his views," said Menon.

But "both prime ministers said we need to overcome these (problems) and move forward," Menon told reporters, adding Gilani had "stressed that across the board in Pakistan, all political parties want improved relations."

The summit is routinely eclipsed by tensions between India and Pakistan, who have fought three wars since the post-colonial partition of the subcontinent.

Gilani also met with Afghan President Hamid Karzai on Sunday, and "the two sides agreed to coordinate their efforts to stop cross border terrorism," a joint statement said.

Foreign ministers of Pakistan and Afghanistan would meet soon "to prepare grounds for a framework for close and constructive engagement between (the) two countries to build confidence and develop a common strategy at the political, military and intelligence levels," the statement added.

Karzai accuses Islamabad of backing Taliban militants, and Afghan officials have also linked Pakistan's shadowy Inter Services Intelligence (ISI) to the Indian embassy bombing -- a charge Islamabad has denied as "rubbish."

At the end of the summit, Singh shook hands with Gilani and Karzai besides other leaders before leaving in a bullet-proof car he brought with him from India despite Sri Lanka saying it was offering "ultimate" security.

Karzai said terrorism was the most "menacing" challenge faced by SAARC, which groups Afghanistan, Bangladesh, Bhutan, India, The Maldives, Nepal, Pakistan and Sri Lanka.

A draft summit declaration called for collective action to combat "all forms of terrorist violence" that was threatening their "peace, stability and security."

The leaders agreed to implement a regional trade pact -- signed in 1995 but never fully implemented -- "in letter and in spirit" to ensure a free flow of goods and services between the region of 1.5 billion people.

SAARC members also noted the urgent need to develop energy and food security, and to look at cutting international telephone call charges within the region to foster closer economic ties.

The summit was held under unprecedented security in insurgency-hit Sri Lanka, which deployed 20,000 additional police and troops to guard delegates.

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