(Reuters) - India and Pakistan will resume formal peace negotiations frozen after July train bombings in Mumbai and set up a joint agency to tackle terrorism, their leaders said on Saturday.

Talks between Indian Prime Minister Manmohan Singh and Pakistani President Pervez Musharraf defied low hopes for progress amid resentment in Islamabad and anger in New Delhi, which blamed Pakistani militants for the carnage in Mumbai that killed 186 people.

"It was agreed that the peace process must be maintained. We instructed our foreign secretaries to resume the comprehensive dialogue as early as possible," Singh said, reading out a joint statement after talks with Musharraf on the fringes of a summit of Non-Aligned Movement nations in Havana.

The leaders of the two nuclear-armed South Asian powers condemned terrorism and vowed joint efforts to stamp it out.

Singh said he and Musharraf "decided to put in place an India-Pakistan institutional mechanism to identify and implement counterterrorism initiatives and investigations."

He said the foreign secretaries would meet soon in New Delhi to prepare for a resumption of formal peace negotiations between states that have fought three wars since their independence from Britain in 1947.

The talks would cover the full range of bilateral issues, including disputed Kashmir, a Muslim-majority Himalayan region that has been the main cause of war between the two states.

India controls about 45 percent of the contested territory, with the rest held by Pakistan and China.

SURVEYS, BUS ROUTES

The long-awaited bilateral summit came a year after Singh and Musharraf met at the United Nations but failed to revive a peace process that was launched in 2004 after the rivals came to the brink of a fourth war.

The two leaders, who met for about one hour in Havana, directed officials to discuss conducting joint surveys of the disputed Siachen region of Kashmir and to consider opening new bus routes to link people divided by their militarized border.

New Delhi had said the bombings in Mumbai were engineered by a Pakistan-based group, Lashkar-e-Taiba, and called on Islamabad to rein in Pakistan-based Islamic militants.

Musharraf, who did not speak to reporters, has also come under pressure from Afghanistan to curb incursions of Taliban and other Islamic militants from Pakistani border areas.

On Friday, he called on fellow Non-Aligned Movement leaders to "oppose the sinister tendencies to associate terrorism with Islam and discrimination against Muslims, which are giving rise to an ominous alienation between the West and the world of Islam."

Better ties between India and Pakistan would help stabilize South Asia, where growing violence in Afghanistan, renewed warfare in Sri Lanka and tensions in Nepal have added to regional instability, political analysts said.