By Sheikh Mushtaq

SRINAGAR, India, Oct 10 (Reuters) - Thousands of Kashmiris staged a demonstration on Friday against the visit of India's prime minister to inaugurate a train link and power project in the disputed region that has seen the biggest anti-India protests in years.

Police fired teargas shells and used batons to disperse several thousand Muslim demonstrators who marched the streets in Srinagar, the summer capital, shouting "We want freedom".

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

Islamabad 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.

Built at a cost of more than 55 billion rupees ($1.1 billion), the project would bring the state more than 9 billion rupees a year, Singh said in his address.

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

Singh is also scheduled to flag off the first ever train service in the Kashmir Valley on Saturday, covering a distance of 117 km (73 miles) between Baramulla town in the north and Qazigund in south Kashmir.

The separatist alliance, the All Parties Hurriyat (freedom) Conference, has called for peaceful protests and a strike on Saturday to protest Singh's visit.

"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 had banned public gatherings for a month to prevent demonstrations.

Authorities have deployed extra troops and intensified patrolling in view of the prime minister's visit.

Over the past two months Kashmir has seen some of the biggest anti-India protests since a separatist revolt against Indian rule broke out in the mountainous state in 1989.

About 40 people have been killed by security forces and more than 1,000 injured in protests that have become an embarrassment for New Delhi. The protests 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 an effort to improve relations 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 Sanjeev Miglani)

(For the latest Reuters news on India see: in.reuters.com, for blogs see blogs.reuters.com/in)

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