The agreements on Monday, by the two nations' foreign secretaries, are part of a step-by-step dialogue process that began last year.
The process is aimed at an eventual summit between the Indian and Pakistani leaders to resolve their conflicting claims to Kashmir, which has led to three armed conflicts.
Pakistani Foreign Secretary Riaz Khokhar met for six hours Sunday and Monday with his Indian counterpart, Shashank, who uses one name.
Khokhar brought invitations from Pakistani President Gen. Pervez Musharraf for Indian Prime Minister Manmohan Singh, President APJ Abdul Kalam and Congress party leader Sonia Gandhi to visit.
Singh gave Khokhar a message to take back to Musharraf.
The foreign secretaries reiterated that the ongoing discussions "would lead to peaceful settlement of all bilateral issues, including Jammu and Kashmir, to the satisfaction of both sides," said a joint statement released by the two governments.
Both sides said the talks were productive.
"There is a new spirit of engaging each other consistently and substantively," said Pakistan's foreign ministry spokesman, Masood Khan.
"You have to satisfy all the parties. That is the understanding that is emerging very rapidly."
"There is a new spirit of engaging each other consistently and substantively"
Pakistan's foreign ministry spokesman
Indian External Affairs Minister Natwar Singh said the foreign secretaries had "positive discussions and concrete outcomes."
In a series of new confidence-building steps, the two countries will work toward an agreement to notify each other before testing missiles. This follows an accord last week to set up a hotline to prevent accidental nuclear war.
The South Asian neighbours also will open consulates in Karachi, Pakistan and Bombay, India and restore their embassies to full strength of 110 staffers each.
The embassy staffs were reduced after a December 2001 attack on India's Parliament led to a break in diplomatic relations and snapping of all transportation links.
Since then, ambassadors and bus, train and air service have been restored.
India and Pakistan will free all fishermen seized in each other's territorial waters and work out ways to release other civilian prisoners, they said.
The foreign secretaries also discussed the possibility of opening a highway closed since the two nations became independent from Britain in 1947.
The road connects the two parts of Kashmir divided between India and Pakistan.
India and Pakistan have fought two full-scale wars and a 1999 border clash over Kashmir.
They haven't held substantive talks on the disputed Himalayan region since 1998, although Musharraf and former Indian Prime Minister Atal Bihari Vajpayee discussed the issue, and failed to agree, in July 2001.
Transportation services between
India and Pakistan to be restored
India accuses Pakistan of training, arming and funding militants fighting for merger of the Indian portion with Pakistan or winning its independence. Islamabad says it provides only moral support to an "indigenous" uprising.
The 14 years of violence in India's only Muslim-majority state has killed more than 65,000 people.
More meetings, on economic co-operation and the technical details to implement the agreements, are to be held from the third week of July to the end of August, when the secretaries will meet again, and the foreign ministers immediately afterward, the joint statement said.