Both attackers were killed and at least three people were wounded on Wednesday, Director-General of Police Gopal Sharma, the state's police chief, said before the sprawling building was gutted by flames 30 metres high.

All the bus passengers were safe, he said.

Smoke poured from the windows of the sprawling quadrangular building as people jumped from the ground floor assisted by soldiers. The heat was so intense that firefighters could not enter the building.

The raid was the biggest attack yet targeted at the bus service, set to be inaugurated on Thursday by Indian Prime Minister Manmohan Singh.

It will connect Srinagar and Muzaffarabad, the capitals of the Himalayan region divided for decades between India and Pakistan.

Officials defiant

Officials in the Indian- and Pakistani-administered sides of Kashmir condemned the attack and said the bus service would go ahead on schedule.

Four Muslim separatist groups, fighting Indian security forces in Kashmir since 1989, claimed responsibility for the attack in a call to The Associated Press.

Tighter security measures failed
to prevent the daring attack

"One man opened fire" at the entrance of the guesthouse, Mohammed Yusuf, a state government employee in Srinagar, summer capital of Indian-controlled Kashmir, said.

Gunfire followed.

It was not known whether there were more attackers. Security forces brought people out of the guest house, asking them to keep their hands raised as troops scoured the complex for the attacker.

One of the injured was a woman shot on the street outside the building, collapsing before television cameras and then hobbling away with a wound in her back and her clothes soaked in blood.

The street was blocked off as dozens of soldiers and police officers swarmed the area.

Attack condemned

The United Nations on Wednesday condemned the attack on the trans-Kashmir bus complex.

"The secretary-general strongly condemns the attack that took place on a complex housing passengers for [Thursday's] inaugural bus service between Muzzafarabad and Srinagar across the Line of Control in Jammu and Kashmir," the spokesman for UN chief Kofi Annan said.

"The introduction of this landmark bus service is a tangible achievement of the composite dialogue between India and Pakistan," the spokesman added.

"Its beneficiaries will be the people of Kashmir who have been divided for decades and traumatised by violence."