By Simon Cameron-Moore and Bappa Majumdar

ISLAMABAD/NEW DELHI, Dec 17 (Reuters) - The time-out called by India in its peace process with Pakistan gives the two countries a chance to salvage the gains of the past four years from the bitter aftermath of the militant attack on Mumbai.

Analysts say there was no way a Congress-led government, with voters baying for a retaliatory strike and an election due by May, could behave in Gandhian fashion by carrying on talks after militants from Pakistan killed 179 people in Mumbai.

India is well disposed toward the nine-month-old civilian government of President Asif Ali Zardari, but distrust of the Pakistani military has become more acute than when former army chief Pervez Musharraf was running the country.

Zardari's soft words over the Kashmir dispute and his stated preference for a no first use accord on nuclear weapons have gone down well with the Indian leadership.

"They are delighted that Zardari has gone the extra mile in the last few months," said Najam Sethi, a respected Lahore-based Pakistani political analyst and newspaper editor, after a visit to New Delhi.

"Their problem is that public opinion being what it is in the wake of Mumbai, I think a decision has been taken that there should be a pause until the next government comes in."

By declaring a "pause" on Tuesday, analysts say Indian Foreign Minister Pranab Mukherjee had effectively asked the Pakistani leadership to choose what matters more to them: peace or protecting jihadis who want war.

Sethi believed both sides wanted to keep the so-called composite dialogue alive as it had been close to settling several territorial disputes before Musharraf's political troubles in 2007 caused both sides to go slow.

Accords on the Siachen Glacier and maritime boundary in Sir Creek were close, and there had even been progress over how to approach the core dispute over Kashmir, Pakistani analysts and politicians say.

WORST FEARS

Yet, chances of the peace process being revived some time after the election depends on how satisfied India is with a crackdown begun last week by Pakistan on Lashkar-e-Taiba, the jihadi organisation blamed for Mumbai, and like-minded groups.

"They obviously ... want to see whether Pakistan goes beyond just house arrests and at least have the leaders prosecuted in a Pakistani court," said C. Uday Bhaskar, a New Delhi-based strategic affairs expert.

He saw the peace process being delayed, but didn't believe the interruption was terminal.

Not everyone is as optimistic. Ayesha Siddiqa, an Islamabad-based defence analyst, saw a danger of a slide back into a South Asian "Cold War".

"It's not going to get better," she said.

The nuclear-armed rivals came close to a fourth war in 2002.

While India has said it has no intention of going to war, there is lingering uneasiness in Islamabad that New Delhi could order an air strike on militant targets in Pakistani territory. Chances of that appear limited given the risk of retaliation.

But there are fears that another militant attack before the polls could tip India into using military force, setting off a chain reaction that would ruin hopes of resuming peace talks.

"It may completely derail the peace process and could open up the floodgates for infiltration from Pakistan into Kashmir again. That would be irredeemable in many ways," said Sethi.

EPIPHANY?

Privately sceptical that Pakistan's security establishment can change its ways, Indian officials know that it is best left to others, including U.S. President-elect Barack Obama, to push Islamabad into doing the right thing.

"Internationally, Pakistan will start feeling more pressure from the United States, the Europeans and the Security Council," Brahma Chellaney, a professor of strategic studies at the Centre for Policy Research in New Delhi told Reuters.

"With a new administration in Washington, there will be increasing focus on Pakistan and I don't think Pakistan will escape from the international spotlight," Chellaney said.

Pakistan, the largest recipient of U.S. aid, needed to observe "the rules of the road" in fighting these groups, said Senator John Kerry, who is expected to take over as chairman of the influential Senate Foreign Relations committee next month.

The implied threat isn't as strong as it might seem.

Pakistan is just an IMF loan away from virtual bankruptcy, and closing the tap on aid could destabilise the government, or cause the army to stop fighting Taliban and al Qaeda militants on the Afghan border. After meeting army chief General Ashfaq Kayani and political leaders on Tuesday, Kerry said the attack on Mumbai by a militant group created almost 20 years ago by Pakistani intelligence agencies had led to something of an epiphany in Islamabad.

He believed that there has been a realisation that militants used to fight Indian rule in Kashmir were no longer assets, but had become out of control, al Qaeda-esque liabilities.

But he tempered his optimism.

"Now we're all going to watch," Kerry said. "This is still evolving."

(Editing by Paul Tait and Dean Yates)

AlertNet news is provided by