By Sayed Salahuddin

KABUL, June 5 (Reuters) - Extremism poses a challenge for Pakistan and Afghanistan and both neighbours need to jointly fight it, Pakistan Prime Minister Shaukat Aziz said on Tuesday.

Ties between the two countries, major U.S. allies in its war against terrorism, have sharply deteriorated over the past 18 months, largely over Afghan complaints that Islamabad is not doing enough to stop resurgent the Taliban operating in Pakistan.

Both nations, which also have historical border disputes, clashed several times in a frontier region in May after Pakistan, stung by accusations of not doing enough to stop the militants, began to fence parts of the border. Kabul opposes the fencing.

Aziz, in Kabul for a development conference, met President Hamid Karzai for the first time since last month's clashes.

During the meeting, they discussed a proposed joint peace council scheduled for August in Kabul to address the cross-border infiltration by militants from Pakistan and overall security.

The proposal for a council was agreed upon during a meeting between Karzai and his U.S. and Pakistani counterparts, George W. Bush and Pervez Musharraf, in Washington last year.

Musharraf and Karzai are expected to address the council, composed of 700 tribal elders, politicians and intellectuals from both Afghanistan and Pakistan.

Aziz said extremism and terrorism posed a challenge for both countries and that they needed to campaign against it together.

"Pakistan and Afghanistan have a shared destiny...," Aziz told a joint news conference after the talks.

"We have to work together," he added.

Karzai said Pakistan should do more to curb militants.

Afghanistan says a resurgent Taliban are operating from Pakistani sanctuaries. Pakistan, the main backer of the Taliban before the Sept. 11, 2001, attacks on the United States, denies that and says the root of the Taliban problem is in Afghanistan.

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