Sajad Gani Lone, chairman of Jammu and Kashmir Peoples Conference, proposed that unified Kashmir be administered by its people, while the region's defence could be the joint responsibility of Kashmiri, Indian and Pakistani authorities.

Lone said "Achievable Nationhood" - a 266-page document - was the first of its kind to be presented by a separatist since the insurgency broke out in Indian Kashmir in 1989.

Among other things, the document envisages unhindered, tax-free movement of goods between the two Kashmirs which India and Pakistan claim in entirety but rule only in part.

"Achievable Nationhood achieves unification of two parts of Jammu and Kashmir," Lone told a news conference.

"Achievable Nationhood propounds the creation of a single Jammu and Kashmir Economic Union which would result in a boundary-less and prosperous Jammu and Kashmir," he said.

Lone's peace formula comes a month after Pakistan President Pervez Musharraf said Islamabad would abandon its claim to Kashmir if India agreed to give the territory autonomy under joint supervision by both countries.

India welcomed the proposal saying it could be discussed during formal peace talks between the two sides.

The nuclear-armed South Asian rivals have fought two of their three wars over Kashmir since they won independence from Britain in 1947.

"The people of J&K (Jammu and Kashmir) have both a responsibility and a right to put forward a clear vision for their future," Lone said.

Lone walked out of Kashmir's main separatist alliance, All Parties Hurriyat (Freedom) Conference, after his father and region's senior separatist leader, Abdul Gani Lone, was assassinated by unidentified gunmen in 2002.

Authorities say violence has steadily decreased in Kashmir since India and Pakistan began a peace process in 2004. But people are still killed in daily shootouts and occasional grenade attacks.

Officials say more than 40,000 people have been killed in the Muslim-majority region in a 17-year revolt against Indian rule. Human rights groups put the toll at around 60,000 dead or missing.

Meanwhile, two civilians were killed and 36 people injured when suspected Islamic rebels hurled a grenade at a security patrol in insurgency-racked Indian Kashmir on Saturday, police said.

The attack took place in Shopian town, 50 kilometres (30 miles) south of Kashmir's summer capital Srinagar.

The suspected Islamic rebels lobbed the grenade at the security patrol in a main market street, a police spokesman said.

At least 32 civilians and four members of the security patrol were injured, the police spokesman said.

The condition of four civilians was critical, he said.