SRINAGAR, India (AFP) - Indian Prime Minister Manmohan Singh offered Kashmiris peace and prosperity as he pulled an army battalion out of the troubled state and held out hope of further troop cuts.
"I have a dream and a firm belief that we can and we shall build a new Kashmir which will become a symbol of peace, hope, prosperity," Singh said on his first visit to the Himalayan valley since taking office in May.
"I have already given instructions to reduce troops in Kashmir and if violence goes down and if infiltration (of militants) ends it will become easier for me to reduce forces further," he told students in Kashmir`s summer capital Srinagar.
He repeated the message in an address to thousands of people gathered at Srinagar`s main cricket stadium and announced 5.3 billion dollars in "economic revival plan".
As the crowd chanted "Give us jobs before peace," Singh said at least 24,000 jobs would be created, adding, "a war has to be fought against unemployment."
"New houses, new schools, new hospitals, new railway lines and more power needs to be generated, more phone connections, better irrigation has to be provided," Singh said.
The visit had almost run into disaster when a deadly gunbattle erupted at the scene of the rally and continued as Singh`s flight landed in the urban hub of anti-India Muslim militancy.
The open-air address was delayed several hours but went ahead as did the troop pullout when 1,000 paratroopers left the northern Kashmiri town of Anantnag.
Two militants were shot dead by Indian troops, a senior Border Security Force officer told AFP. Army reports of a civilian killed in crossfire were denied by the Central Reserve Police Force.
Sporadic shooting crackled out for about three hours after a troop patrol first came under fire, despite a security blanket thrown over Srinagar.
A strike called by a hardline separatist faction kept virtually all shops and businesses closed, reporters said.
The premier, who went first to the city`s main Hazratbal mosque, appeared unperturbed and later addressed the rally in Urdu.
"We are talking to Pakistan so that this meaningless violence ends," Singh said.
"I have extended a hand of friendship to Pakistan," Singh went on, adding that he had told President Pervez Musharraf, "we can find solutions to all issues if we work with humanity and honestly."
Singh had told the students his government was committed to a "purposeful" dialogue with Pakistan to settle all outstanding issues.
"Our only condition is that, as agreed to by Pakistan, territory under control of Pakistan should not be used to promote cross-border terrorism directed against us."
Pakistan welcomed the first withdrawal of Indian troops from disputed Kashmir.
"This is a positive development and a good beginning," foreign ministry spokesman Masood Khan told AFP.
"We hope that gradual reduction of troops would provide relief to the Kashmiris, promote respect for their human rights, and reinforce the dialogue process."
The neighbours began talks earlier this year on resolving all disputes including Kashmir, the trigger of two of the three wars between them since 1947.
Pakistani Prime Minister Shaukat Aziz is due in New Delhi next week for talks and another round of dialogue is set for the end of the month.
In a nod to separatists, Singh also renewed a promise to hold "unconditional dialogue" with "anyone and everyone in the state who abjures violence."
In the same Srinagar stadium former Indian premier Atal Behari Vajpayee addressed a meeting in April last year and extended a "hand of friendship" to nuclear-armed rival Pakistan.
Singh himself announced the troop reduction last week.
The first Indian forces left in a convoy of trucks and buses, an AFP correspondent said.
The paratroopers, stationed at Anantnag, 50 kilometers (30 miles) south of Srinagar for the past six months, headed for the northern Indian city of Agra.
"The first batch of troops commenced de-induction from the valley on November 17," defence spokesman R.K. Sen announced.
Indian Kashmir`s chief minister Mufti Mohammed Sayeed said people in the region were "happy" at the troop pullout.
"It should have an impact on the overall situation in the state," he said.
"Now we expect a reciprocal step by Pakistan. There should be no violence (in Kashmir), there is no reason for it."
The army has not said how many troops would be removed from Kashmir.
Military experts estimate that India has about 250,000 troops in the region.

11/17/2004 - 11:20 GMT - AFP