Pakistan carried out a second missile test in three days on Monday after saying it was preparing for an incursion by India, as Moody's warned that the standoff over violence in Kashmir could set back Islamabad's economic reforms.

India and Pakistan are scrambling resources both military and diplomatic to respond to a crisis triggered by a massacre in Indian-controlled Kashmir that has heightened fears of a conflict between the nuclear-armed rivals.

The April 22 terrorist attack in Kashmir inflamed a long-simmering conflict that could boil over into military confrontation.