By Paul Eckert, Asia Correspondent

WASHINGTON, Oct 2 (Reuters) - The next U.S. president must revamp policy toward Pakistan, mixing deft diplomacy, security support and economic aid to help Islamabad defeat a grave threat from extremists, an experts' report said on Thursday.

Pakistan Policy Working Group, a bipartisan group of a about a dozen experts on U.S.-Pakistan relations, said the nuclear-armed Muslim country of 160 million people could pose the "single greatest challenge" for the next U.S. president.

"Washington needs to rethink its entire approach to Pakistan," said the report. "We must be much smarter about how we work with Pakistan, with whom we work, and what sort of assistance we provide," it added.

The report said last month's bombing of the Marriott Hotel in Islamabad showed that U.S. options were diminishing rapidly and there was no time to lose. It also warned that increased U.S. missile attacks on targets inside Pakistan, reflecting impatience with Islamabad, are counterproductive.

A review of policies toward Pakistan, recipient of $11 billion in mostly military aid from the United States since the Sept. 11, 2001, attacks, should begin with updating the National Intelligence Estimate on the country to form a strategic plan for all U.S. government agencies, it said.

The 43-page report sets out recommendations for new U.S. policies in the areas of Pakistani domestic politics, counterterrorism and domestic security, regional relationships and U.S. aid to Pakistan.

In the domestic arena, the United States needs to be patient with the new elected government, help build up democratic institutions and support broad reforms, it said.

"Just as the U.S. was too slow in gauging the public disaffection with President (Pervez) Musharraf before the 2008 elections, it must not too quickly lose patience with Pakistan's elected leaders," it said.

PAKISTAN-AFGHANISTAN-INDIA TRIANGLE

In the security sphere, the report urges Washington to boost support for Pakistani civilian institutions that can oversee military and intelligence agencies, who often operate autonomously and have used Islamic militants as a foreign policy tool against India and Afghanistan.

"The U.S. should seek to adjust Pakistan's cost-benefit calculus of using militants in its foreign policy," it said.

Military assistance should be used to transform parts of the Pakistan Army and the Frontier Corps, which operate in border tribal areas, into effective counterinsurgency forces.

On regional relations, the report recommends naming a senior U.S. official responsible for promoting better ties between Pakistan and Afghanistan, whose animosity hampers cross-border counterterrorism efforts. Similar efforts are needed to encourage the India-Pakistan peace process, it said.

"U.S. diplomatic initiatives toward Pakistan must also demonstrate that a convergence of U.S., India, and Afghanistan interests on terrorism does not mean the three countries are colluding against Pakistan," the report said.

The group endorses a bipartisan U.S. aid plan introduced in July by Democratic Sen Joe Biden and Republican Sen Richard Lugar, which calls for $1.5 billion per year in nonmilitary spending to support economic development in Pakistan.

"Such assistance, however, must be performance-based, and must be accompanied by rigorous oversight and accountability," said the report. It also recommends favorable U.S. market access for Pakistani textiles and for products produced in tribal regions on the Afghan-Pakistan border. (Editing by Jackie Frank)

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