(Adds deaths, prime minister's news conference)

By Sheikh Mushtaq

SRINAGAR, India, Oct 10 (Reuters) - At least two people were killed in Kashmir on Friday in a protest against the Indian prime minister's visit to inaugurate a train link and power project.

Over the past two months the disputed region has seen some of the biggest anti-India protests since a separatist revolt against Indian rule in 1989. About 40 people have been killed by security forces and more than 1,000 wounded.

On Friday, two were killed and about 75 people were wounded when police fired bullets and teargas shells and used batons to disperse Muslim demonstrators who marched the streets in Srinagar, the summer capital, shouting "We want freedom".

Police said clashes between protesters and troops broke out in other major towns.

Indian Prime Minister Manmohan Singh offered new dialogue with the separatists to end the violence.

"The government welcomes dialogue with all sections of people," he told a news conference. "I urge that whoever has complaints and grievances should come forward for a dialogue."

Earlier, Singh, accompanied by Sonia Gandhi, leader of the ruling Congress party, inaugurated a 450-megawatt hydro power project at Baglihar Dam on the Chenab river, which flows from Indian Kashmir into Pakistan.

Pakistan has objected to the dam, saying it will shrink its access to water. India has rejected the charge and says the project is crucial for power-starved Kashmir.

Costing more than 55 billion rupees ($1.1 billion), the project would bring the state more than 9 billion rupees a year, Singh said.

"The same amount could be now used for the welfare for the people and other developmental schemes in the state," he said.

FIRST TRAIN SERVICE

Singh is due on Saturday to inaugurate the first train service in the Kashmir Valley, covering 117 km (73 miles) between Baramulla in the north and Qazigund in south Kashmir.

The separatist alliance, the All Parties Hurriyat (freedom) Conference, has called for protests and a strike on Saturday.

"Kashmir's problem is neither of laying railway links, nor providing economic packages or power projects," said Mirwaiz Umar Farooq, chairman of Hurriyat. "It is the question of political aspirations of the people."

Tens of thousands of Indian troops earlier this week thwarted a planned pro-independence rally in Lal Chowk (Red Square), the historic centre of Srinagar, and the government has banned public gatherings for a month.

The protests, which have become an embarrassment for New Delhi, had subsided for a few weeks during the Muslim holy fasting month of Ramadan which ended on Sept. 30.

On Thursday, a group of 19 businessmen from Pakistani Kashmir arrived in Indian Kashmir on a week-long visit to discuss trade, part of efforts to improve ties between India and Pakistan, which claim the region in full but rule in parts.

The two rivals last month agreed on arrangements for a route for bilateral trade through the Line of Control, a military control line that divides Kashmir. (Additional reporting by Ashok Pahalwan; Editing by Rina Chandran and Elizabeth Piper)

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