INTERVIEW-Pakistan FDI to rise, militancy deters -govt official

* Pakistan FDI likely to rise in 2nd half

* Militancy remains strong deterrent for investors

* Pakistan has always been talking to Indian investors

By Carolyn Cohn and Isabel Coles

LONDON, Feb 10 (Reuters) - Foreign direct investment in Pakistan could return to a positive trend this year, but militancy is a deterrent to investors, the country's investment minister said on Thursday.

Floods last year caused nearly $10 billion in damages to Pakistan, and the country's costly war against Islamist insurgents has also weighed on its efforts to attract foreign investment.

Foreign direct investment fell 15 percent in the first six months of fiscal year 2010/11, to $830 million.

But Saleem Mandviwalla said the end of the global recession would help growth and investment into Pakistan.

"I feel (FDI is) a very cosmetic fall. I can see the graph now moving towards the positive side," he told Reuters in an interview. Mandviwalla was in Britain to meet investors. Britain is Pakistan's second largest trading partner and Mandviwalla earlier told an investor conference that he would like to see Britain double its trade with Pakistan in the next five to 10 years.

But he added many investors were scared to go into Pakistan due to militancy levels.

"Our problem is basically terrorism. It's a very uphill task for me to talk about investment in this environment," Mandviwalla said.

"It brings us down, we sometimes wonder how we will reach our goals that we set out every day to reach," he told the conference.

A 12-year old boy wearing school uniform blew himself up at a Pakistani army recruitment centre on Thursday, killing 31 cadets, officials said. [ID:nSGE71901R]

The government has revised its 2010/11 GDP growth forecast following the floods, to 2.5 percent for the fiscal year ending June 30, compared with an earlier forecast of 4.5 percent.

Growth was 4.1 percent in 2009/10.

Record high food prices were a threat to inflation levels in Pakistan, Mandviwalla said, with annual inflation already running above 15 percent.

"This is a very, very difficult situation for us. Food inflation is the main problem that we are faced with."

The resumption of peace negotiations with India was a positive step, Mandviwalla said, adding:

"We have been actually talking to India and I have been receiving Indian investors all the time ... we are very keen to bring Indian investment and investors to Pakistan."

India and Pakistan said on Thursday they would resume formal peace talks, the first since New Delhi broke off peace negotiations after militant attacks on Mumbai in 2008.

Pakistan's stock market .KSE, a constituent of the closely-tracked MSCI frontiers index, rose nearly 30 percent last year, despite the floods and militancy. (Editing by Catherine Evans)