India warns of 'crushing response' after Kashmir suicide attack

India's prime minister has warned of a "crushing response" to the suicide bombing of a paramilitary convoy in Indian-controlled Kashmir which killed 41 people and was the deadliest in the divided region's volatile history.

Narendra Modi placed the blame for yesterday's bombing on Pakistan, which India accuses of supporting rebels in Kashmir.

"Our neighbouring country thinks such terror attacks can weaken us, but their plans will not materialise," he said, adding that government forces have been "given total freedom" to deal with the militants.

"Security forces have been given permission to take decisions about the timing, place and nature of their response," he said.

Pakistan's ruling party rejected his allegation, saying India's ruling party was blaming Pakistan for the attack for political gains in an upcoming national election.

"The Indian allegations against Pakistan over yesterday's incident are part of the election campaign," said Naeemul Haq, a senior leader of the Tehreek-e-Insaf party, which came to power in last year's parliamentary election.

He said the violence in Kashmir was "the result of the brutalities of Indian-occupied forces in Kashmir".

The attack has ratcheted up already high tensions between the nuclear-armed neighbours, who both administer parts of the disputed territory but claim it entirely.

Indian finance minister Arun Jaitley said New Delhi was withdrawing the most-favoured nation trade status given to Pakistan and would take all possible diplomatic steps "to ensure the complete isolation from international community of Pakistan of which incontrovertible evidence is available of having a direct hand in this gruesome terrorist incident".

Pakistan's Foreign Ministry said the country condemns acts of violence anywhere in the world and denied involvement.

"We strongly reject any insinuation by elements in the Indian media and government that seek to link the attack to Pakistan without investigations," it said in a statement.

Rebels, many of whom want Kashmir united with Pakistan, have been fighting Indian control since 1989, but the Muslim-majority region has experienced renewed attacks and repeated public protests in recent years as a new generation of Kashmiri rebels, especially in southern areas, has challenged New Delhi's rule with a mixture of violence and social media.

In Thursday's attack, a local Kashmiri rammed an explosive-laden van into a bus travelling in the paramilitary convoy. In addition to the dead, the attack wounded nearly two dozen other soldiers, India's paramilitary Central Reserve Police Force spokesman Sanjay Sharma said.

Police said the bus was destroyed and at least five other vehicles were damaged.

The Greater Kashmir newspaper reported that militant group Jaish-e-Mohammed claimed responsibility. A pre-recorded video circulated on social media showed the purported attacker in combat clothes, surrounded by guns and grenades.

Authorities suspended movement of security convoys in the Kashmir valley today and home minister Rajnath Singh arrived in Srinagar to review the security situation.

The attack has raised tensions elsewhere in Hindu-majority India. Hundreds of residents carrying India's national flag in Hindu-dominated Jammu city in the Muslim-majority state burned vehicles and hurled rocks at homes in Muslim neighbourhoods, officials said.

Authorities imposed a curfew and appealed for restraint. Some people were reported injured in the mob attacks.

Nearly 100 protesters chanting slogans such as "Pakistan down!" and "Attack Pakistan!" burned an effigy of Pakistani prime minister Imran Khan in a park close to India's Parliament in New Delhi.

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