"This indeed is a landmark decision," Pakistan's Foreign Minister Khurshid Mahmud Kasuri said as he announced agreement on the Safta framework.
"The South Asian Free Trade Area agreement will take effect from January 1, 2006 in all Saarc countries simultaneously," Pakistani commerce ministry spokesman Zafar Qadir said.
The agreement envisions a free trade regime among Bangladesh, Bhutan, India, the Maldives, Nepal, Pakistan and Sri Lanka, home to one-fifth of the world's population and almost half its poor.
They make up the South Asian Association for Regional Co-operation (Saarc), which was founded in 1985 to forge economic solidarity and boost standards of living.
Implementation of the new tariff regime offers three sets of deadlines according to member states' varying economic prowess.
"Pakistan and India will complete Safta implementation by the year 2009 whereas Sri Lanka will take another year (2010) to bring its tariff down to five to zero percent," Qadir said.
Bangladesh, Bhutan, the Maldives, and Nepal, with weaker economies, have received concessions to avail of a longer deadline that would end by 2013.
Kasuri said each member state would be allowed to maintain a sensitive list of products on which tariff would not be reduced.
"This list will be maintained from now and the date on which the Safta will come into force," he told reporters at the end of pre-summit talks among foreign ministers.
Liberal trade would benefit all Saarc countries but there is specific scope for larger trade volume between India and Pakistan.
While official trade between the two stands at 204 million dollars, the real value of informal trade is estimated at some seven times higher at around 1.5 billion dollars.
"We believe that existing bilateral trade will increase manifold between the two countries," Qadir said.
The Saarc Chamber of Commerce and Industry, which has been a driving force behind Safta, predicts a boost of up to four billion dollars.
"If good relations prevail there is a potential for three to four billion dollars in bilateral trade over two years," spokesman Waqar Ahmed told AFP.
Pakistan, less advanced economically than India, could face tough competition from cheaper Indian goods but Pakistanis are undeterred by the upcoming regional trade regime.
"It is fair to say that Indian goods are cheaper than ours but it is not applicable to all things. If they have goods to offer in the engineering and machinery sector, our textile industry is far more competitive than theirs," said Zafar of Pakistan's commerce ministry. "Some of our fine goods could complement our exposed sectors."
Regional trade could serve as a catalyst to bringing the nuclear rivals closer and helping to alleviate grinding poverty.
"The ice has started melting now," said Ilyas Bilour, president of the India Pakistan Chamber of Commerce and Industry.
"Safta could be a good tool to address the miseries of the poor masses in the two countries, who can now have access to the cheaper goods."