India has told Pakistan to halve its embassy staff in New Delhi within 48 hours and suspend commercial over-flights from New Year's Day.
Announcing the decision of the cabinet committee on security, the Foreign Minister Mr Jaswant Singh said the remaining diplomatic staff and their families would not be allowed beyond Delhi's municipal limits.
The committee stopped short of imposing economic sanctions on Islamabad, following the military build-up between the two south Asian nuclear powers after the December 13th attack on India's parliament.
India blames two Muslim militant groups backed by Pakistan's Inter Services Intelligence for the attack in which 14 people including the five gunmen died. It wants Islamabad to arrest leaders of the guerrilla groups fighting Indian rule in Kashmir state and hand them over to be tried.
Mr Singh said: "We hope that Pakistan will understand the gravity of the situation and take urgent measures to curb the activities of terrorist groups operating from its territory."
Pakistan has denied involvement, dismissed India's evidence as insufficient and offered to jointly investigate the attack. India has declined this offer, mobilised its military, withdrawn its ambassador in Pakistan and announced the termination of cross-border bus and rail links from January 1st.
The Defence Minister, Mr George Fernandes, said troop deployment along the 2,070-mile border would be completed by the weekend. India has also deployed its nuclear-capable missiles along the border in response to a similar move by Pakistan.
Amid appeals from the international community for restraint, Mr Fernandes said: "We want to give diplomacy a chance from a position of strength."
Defence officials said the navy had also been placed on high alert, ready for deployment off the Pakistani coast, "minutes away " from striking at Karachi harbour, through which over 90 per cent of Pakistan's trade, especially its oil supplies, pass.
Strategic manoeuvres by the Indian navy along Pakistan's coastline hastened the end of border conflict in northern Kashmir in 1999.
Efforts by the international community to defuse tension between the nuclear rivals took a new twist when the US proscribed Lashkar-e-Taiba and Jaish-e-Mohammadi, the two Pakistani-based militant groups blamed by India for attacking its parliament.
Soon after Washington's announcement, Pakistan described both militant groups as "illegal and unconstitutional armies" that needed to be reined in. But Mr Singh dismissed Pakistani moves as "cosmetic" as the militants had simply regrouped under a different banner.
The military build-up by both countries, the biggest in almost 15 years, is continuing.
