* Will free up trade on most items by February
* Business leaders optimistic, India defense chief sounds caution (Adds defense minister, business sector quotes)
By Matthias Williams
NEW DELHI, Nov 15 (Reuters) - Pakistan took further steps toward normal trade and travel ties with India on Tuesday, agreeing to open most commerce with its larger neighbour by February and ease visa rules in the latest sign of a thaw in relations between the nuclear-armed rivals.
"We have turned the corner," Pakistan's Trade Secretary Zafar Mehmood said at a joint news conference with his Indian counterpart in Delhi.
"We are talking of a complete normalisation roadmap."
The two countries' trade secretaries agreed Pakistan will replace a limited list of items India can sell across the border with a short list of items that cannot be traded, minutes of the meeting showed.
Lasting India-Pakistan peace is seen as vital to South Asian stability and to smoothing a dangerous transition in Afghanistan as NATO-led combat forces plan to withdraw from that country in 2014.
Distrust, border clashes and militant attacks have undermined stability in the region ever since two nations were carved out of colonial India in 1947 with the disputed region of Kashmir at the heart of the problems.
They have fought three all out wars since independence from the British. The border still bristles with soldiers who often exchange fire and both sides man the world's highest battlefield, the 6,000 meter altitude Siachen glacier.
Even so, the atmosphere between the two countries is at its warmest in years following a flurry of high level meetings and Pakistan's promise last month of a most-favoured-nation trade status for India.
Indian Prime Minister Manmohan Singh and his Pakistani counterpart Yusuf Raza Gilani promised to open a new chapter in their fraught history after a nearly an hour-long discussion at a resort island in the Maldives last week.
On Tuesday, India and Pakistan agreed to push for easing of visa rules that severely restrict travel across the heavily armed border. They will look at the feasibility of electricity trading and will open a second road trading post by February.
Under the existing practice, both countries require businessmen to register with police on their arrival and regularly report to them. Visas are issued only for one city.
"This time it is different. It's not just politicians giving statements; there's a whole roadmap chalked out with a time frame," Amin Hashwani, president of the Pakistan-India CEOs' Business Forum told Reuters.
The 'negative list" of items that India will initially be restricted from trading includes the pharmaceutical and engineering industries, S.M. Muneer, president of the India-Pakistan chamber of commerce told Reuters.
Pakistani pharmaceutical and engineering companies are worried they will be swamped by Indian imports.
Mehmood said the list would be drawn up within a couple of months then gradually phased out. He said an expert panel would decide in January on allowing the trade of oil products.
In contrast to the excitement in the business community, India's defense minister sounded a note of caution.
"There are positive signs for a breakthrough but one should not expect a miracle," Defence Minister A.K. Antony told reporters at a meeting on regional security.
"We need to change our mindset if we really wish to reap the benefits of mutual cooperation," he said.
In February, India and Pakistan resumed peace talks that collapsed in 2008 when Pakistan-based militants attacked the Indian city of Mumbai. Indian Prime Minister Manmohan Singh said last week another cross-border attack would put an end to the peace process.
Buy-in from the military on both sides will be crucial to building lasting peace, with Pakistan's security forces seen as both more powerful and more cautious about a detente than the country's often unstable civilian governments.
Business leader Hashwani said the army was on board this time. "Contrary to popular belief, the Pakistan army has been tacitly supportive of a good relationship with India," he said.
He called on the two countries' leaders to make the most of the current goodwill between the nations.
"It is very important, as the Chinese say, to cross the river by feeling the pebbles under both your feet," he said.
The rapprochement is "a game-changer" if it works, a senior US official in Islamabad recently said. "It's going the right way. And they've made more progress than many expected." (Additional reporting by Chris Allbritton and Augustine Anthony in Islamabad Writing by Frank Jack Daniel; Editing by Malini Menon and Ed Lane)
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