India and Pakistan announced in a joint statement on Tuesday that they had agreed to start a broad dialogue next month, after a ground-breaking meeting between Musharraf and Indian Prime Minister Atal Behari Vajpayee.
"History has been made," Musharraf told a news conference.
"This is a beginning. This statement is not an end in itself, obviously, but a good beginning has been made."
A joint statement said the two sides had agreed to start a dialogue in February 2004, although details had to be worked out.
"The two leaders are confident that the resumption of the composite dialogue will lead to peaceful settlement of all bilateral issues including Jammu and Kashmir," they said.
Pakistan's Foreign Minister Khurshid Mahmud Kasuri praised the deal as a victory for both sides.
"It is a victory for commonsense, it is a victory for moderation, it is a victory for statesmanship, it is a victory for the people of India and Pakistan, it is victory particularly for the poor people of South Asia," he told a news conference.
The two sides almost came to war in 2002 after an attack on the parliament in New Delhi that India blamed on Pakistani-backed militants.
But in April, the 79-year-old Vajpayee launched what he called a final attempt for peace in his lifetime. In November Pakistan announced a ceasefire along the front line dividing the two armies in Kashmir.
"Still a long way to go"
"There seems to be a recognition on both sides that the other is serious," said one diplomat. "That is a fundamental step, simply to have overcome the mistrust."
But he added: "There is still an awfully long way to go."
"It is a victory for commonsense, it is a victory for moderation, it is a victory for statesmanship, it is a victory for the people of India and Pakistan, it is victory particularly for the poor people of South Asia"
Khurshid Mahmud Kasuri
Pakistan Foreign Minister
One of the most difficult challenges - crucial to any lasting solution to the bloody dispute - will be satisfying the aspirations of the people of Kashmir. That will mean reducing the violence in the region and improving the lives of ordinary Kashmiris.
The Himalayan region of Kashmir has been split between India and Pakistan since just after independence from Britain in 1947. It has been the cause of two of their three wars and the dispute has cost tens of thousands of lives.
India accuses Pakistan of arming and training "militants" fighting Indian rule in Kashmir, and has refused to talk until it has evidence Pakistan is no longer encouraging "cross-border terrorism".
Pakistan denies fuelling the militancy and accuses India of heinous rights abuses in its part of Kashmir.