* Tensions escalate over fighting in Kashmir border area
* Army chief says India soldiers will retaliate if provoked
* Worst Pakistan, India violence in region since 2003
* Each nuclear-armed side blames the other for hostilities
By Sanjeev Miglani
NEW DELHI, Jan 14 (Reuters) - India's army chief threatened to retaliate against Pakistan for the killing of two soldiers in fighting near the border of the disputed region of Kashmir, saying he had asked his commanders there to be aggressive in the face of provocation.
General Bikram Singh's remarks come amid mounting public anger in India after Delhi accused Pakistani soldiers of slitting the throat of one of the soldiers and decapitating him.
Despite each side blaming the other for the worst outbreak of violence in the area since a ceasefire was agreed nine years ago, analysts said a breakdown in ties was highly unlikely.
The two nations have fought three wars, two over Kashmir, since independence in 1947 and are now both nuclear-armed.
Calling the beheading of the soldier "gruesome", Singh told a news conference: "We reserve the right to retaliate at a time and place of our choosing."
Singh said the Indian army would honour the ceasefire in Kashmir, so long as Pakistan did, but would respond immediately to any violation of the truce.
"I expect all my commanders at the Line of Control to be both aggressive and offensive in the face of provocation and fire," he said.
Last week's fighting in the Himalayan region both nations claim comes at a time when the two sides have made some progress in repairing ties, notably by opening trade links.
Both armies have lost two soldiers each in the fighting along parts of the 740-km (460-mile) de facto border this month.
"The attack on January 8 was premeditated, a pre-planned activity. Such an operation requires planning, detailed reconnaissance," Singh said.
His remarks came hours before local commanders met at a crossing point on the ceasefire line for the first time since the fighting erupted to try and reduce tensions. Both sides lodged protests, accusing each other of ceasefire violations.
The ceasefire in Kashmir has held since it went into effect in November 2003, surviving even the crisis in ties after the Mumbai attacks in November 2008 by Pakistan-based militants.
Analysts said it was unlikely the two armies would escalate the situation further and that Singh's remarks may well have been made to maintain the morale of his troops and to respond to a public outcry over the mutilation of both soldiers' bodies.
"He is trying to tell Pakistan that it cannot afford to open another front while it is in a very critical state because of a large number of internal issues," said research fellow Ashok K. Behuria at the New Delhi-based Institute for Defence Studies and Analysis.
"He's under pressure from the Indian people and the media but I don't think that India will be so proactive as to respond disproportionately to the situation," Behuria said.
The family members of the slain Indian soldier, Hemraj Singh, have started a hunger strike demanding retribution and that his remains be back brought back. The family is not related to the army chief.
"Our demand is not something big. My brother's head should be brought back and the Pakistanis should be taught a lesson," said Jai Singh in their village in northern India.
The flare-up began on Jan. 6 when Islamabad accused Indian soldiers of entering its territory and killing a soldier. India said Pakistani soldiers came about 600 metres (yards) into its territory two days later and killed two Indian soldiers on patrol, the attack the army chief was referring to.
Pakistan said one of its soldiers was killed in further fighting on Thursday. And, at a flag meeting in Chakan da Bagh in the Poonch sector, Pakistan accused India of a raid across the ceasefire line last week, a Pakistani army statement said.
Tensions at the Kashmir frontier have been rising for some months now with the two sides exchanging fire near a village in a northern stretch that may have started the latest series of attacks and counter attacks.
Singh said Indian troops had tried to improve their defences after coming under constant fire from Pakistan at Charonda village deep in snow-capped mountains in the Uri sector where Pakistan troops were in an advantageous position.
Three civilians including a pregnant 23-year-old had been killed in cross-border fire from Pakistan in October, he said.
"In that areas when you are being fired upon, you don't expect soldiers to walk in the open. Therefore soldiers have prepared a communication trench, a crawl trench and an observation post," he said. Such activity was routine and done by both armies to secure defences, he said.
Pakistan said the construction of concrete defences was prohibited under the terms of the ceasefire.
Hundreds of people protested on Monday in Muzaffarabad, the capital of Pakistan-controlled Kashmir, and in second city Mirpur, accusing India of stepping up tensions.
"They (Indians) are bent upon destroying peace along the Line of Control by resorting to firing without any provocation," Pakistani Kashmir prime minister Chaudhry Abdul Majeed told the Muzaffarabad rally.
Tensions over the hostilities in Kashmir threatened to spill into sport, with members of India's Mumbai-based right wing Shiv Sena party protesting against the presence of Pakistani players in a domestic Indian hockey league.
The players had to be whisked away and the team subsequently left Mumbai on Monday for New Delhi, where the inaugural match of the five-team Hockey India League will be held.
"Pakistan is involved in militant attacks on India and you are letting them make money in India ... this is injustice to the martyrs who have died in these attacks," Rahul Narvekar, a spokesman for the party told Reuters.