India accused Pakistan of having a "direct hand" in one of the deadliest terror attacks in Kashmir and warned of stern action as anger and outrage mounted over the death of 44 soldiers.

Analysts said this would escalate tension between the two countries, particularly with pressure on Prime Minister Narendra Modi to take strong action ahead of the elections in the coming months.

On Thursday, a suicide bomber rammed a 350kg explosive-laden SUV into a bus carrying paramilitary soldiers belonging to the Central Reserve Police Force at Pulwama in Jammu and Kashmir.

The soldiers, who along with the armed forces, were stationed in Kashmir for peacekeeping, were part of a convoy. Local police identified the bombers as Adil Ahmed, a member of the Pakistan-based terror group Jaish-e-Mohammad (JeM), which claimed responsibility for the attack. Ahmed, 19, was a school dropout.

Mr Modi warned of tough action.

"I know there is deep anger. Your blood boils looking at what has happened. At this moment, there are expectations and the feelings of a strong response which are quite natural. We have given full freedom to the security forces," he said in a statement on the attack.

"Our neighbour, which is already isolated by the global community, is in a state of illusion if it thinks it can demoralise India with its dastardly acts and nefarious designs."

Finance Minister Arun Jaitley said, after a high-level government meeting, there was "incontrovertible evidence" that Pakistan had a direct hand in the attack, and announced that India was stripping Pakistan of the Most Favoured Nation status.

This should have limited impact as trade between the two countries is low, at US$2 billion (S$2.7 billion).

Pakistan has denied having any hand in the terror attack on the convoy. "We strongly reject any insinuation by elements in the Indian government and media circles that seek to link the attack to the State of Pakistan without investigations," it said in a statement.

Yesterday, India also lodged a diplomatic protest over the attack and demanded verifiable action against the JeM, sources said.

In spite of a 2003 ceasefire agreement, both countries regularly exchange fire along the Line of Control, the de facto border.

In recent years, there has been a deterioration of law and order following the killing of Burhan Wani, the commander of the Kashmiri militant group Hizbul Mujahideen, by security forces in 2016. That year, India maintained it had launched surgical strikes in Pakistan in retaliation for a terror attack on an Indian Army camp in Uri.

Indian television debated if India would once again opt for a surgical strike in Pakistani territory.

"The options before the government are limited. We don't have dialogue with Pakistan," said former foreign secretary Lalit Mansingh. "There will be further freezing of relations preventing delegation meetings and people to people contact."

With elections coming, no government would like to seen as helpless and lenient in the face of attack, he said, predicting a rise in tensions.

Global condemnation of the attack has been made, including by the US. "The UN-designated, Pakistan-based terrorist group Jaish-e-Mohammad has claimed responsibility for this heinous act. We call on all countries to uphold their responsibilities pursuant to UN Security Council resolutions to deny safe haven and support for terrorists," said the US State Department.

But analysts said India would have a tough time isolating its neighbour diplomatically especially as Pakistan, with its ties to the Taleban, is deemed crucial for US plans to withdraw from Afghanistan.

Security analysts said that investigations would include how the car got so close to the convoy and on possible security lapses.