"We are improving our relations, we are trying to resolve our disputes, and there is reasonable progress," he said during an address to students in the southern city of Cordoba.

Pakistani and Indian leaders began a series of negotiations in 2004 to help resolve the Kashmir issue and other disputes.

The neighbouring countries have fought two wars over Kashmir, a mountainous Himalayan region divided between them and claimed in its entirety by both, since their independence from British rule in 1947.

Tensions between the two nations flared again following a suicide attack on the Indian parliament in December 2001 that killed 14 people which some in India suggested was carried out by Kashmiri militants armed and trained by Pakistan.

Islamabad denied the allegation.

The incident led to a massive build-up of troops along their common border during 2002 and international concern about a possible war.

Musharraf was in Spain as part of a four-nation tour of Europe which also includes stops in Poland, Bosnia and Turkey.

Musharraf earlier said terrorism will not be solved unless solutions for the Palestinian-Israeli conflict are found first.

"We can not say we will stop terrorism and extremism and then we will look at solving this dispute. This is putting the cart before the horse, it is not do-able," he said during an address to university students in the southern Spanish city of Cordoba.

"If we want to bring harmony to the world we can not fail to resolve the Palestinian dispute, whatever it costs," he added.

Pakistan, a key ally in the US-led war against terrorism, backs a separate state for Palestinians with Jerusalem as its capital and recognition of the existence of the state of Israel.

Musharraf said political disputes like the Palestinian-Israeli conflict together with poverty and illiteracy were the three main causes of terrorism.

"Terrorism is a symptom, we must get at the cause. If we keep battling the symptom we will never win," he added.

Musharraf was in Spain as part of a four-nation tour of Europe that includes stops in Bosnia, Poland and Turkey.

Musharraf accused the Afghan government of "doing nothing to fight terrorism" and of "losing the war" against the Taliban, in remarks published here yesterday.

"Those who do nothing against terrorism, like (Afghan President Hamid) Karzai, are also the ones who criticize those who are fighting, like us," Musharraf told Spanish daily El Pais during a visit to Spain.

He also denied accusations from Karzai that al-Qaeda head Osama bin Laden and Taliban leader Mulla Mohammad Omar were in Pakistan, saying the two men were "probably" holed up in Afghanistan.