Addressing an Iftar reception hosted by Information Minister Sheikh Rashid Ahmed and also attended by Prime Minister Shaukat Aziz, the President asked the media to debate the issue in this background to consider which possible options enjoyed broad national consensus.
"I will just leave food for thought for you. Take the whole of Kashmir. There are seven regions. Two of these regions are in Pakistan, five are in India," Musharraf said in remarks broadcast on PTV.
"In my view, identify the region, whether this is whole seven or part, identify the region, demilitarise the region, troops out, and change its status."
Musharraf first spoke about the demilitarisation option in an interview with India's Asian Age newspaper published this month.
"In my view if there is a way found in this, each country (Pakistan and India) will be able to say we have not given up, or even if we have given up, the other has given up too.
Kashmiris, too, in my opinion would be okay ...," he said.
In the past Pakistan and India have stuck to their respective positions with little sign of flexibility.
Musharraf said the nature of the status could be discussed later and that could include "independence", a "condominium" in which there was joint control, some United Nations mandate, or consultations with legal experts for some other kind of status.
"I have never spoken like this to anyone. I would request you to debate on these lines," Musharraf said.
Last year, Musharraf told Reuters he could set aside Pakistan's demand for a referendum and meet India half way.
Musharraf said progress had been made when he met Indian Prime Minister Manmohan Singh on the sidelines of the UN General Assembly in New York recently, and he was optimistic the 57-year dispute could be resolved.
"I strongly believe there are options and there is a solution," he said.
"For the first time we see light at the end of the tunnel."
He said the status quo in Kashmir is unacceptable and the Line of Control cannot be a solution to the lingering dispute between Pakistan and India.
In his address, Musharraf touched upon a host of issues Pakistan is facing internally and internationally and said a paramount responsibility devolves on the media to project these in their proper perspective.
The President particularly appealed to the media to report the country's fight against extremism and terrorism in a proper light and expose perpetrators of the menace as criminals and not as heroes. However, he noted a lot of improvement in the local media in recent years, saying that he is satisfied with their overall performance.
Reiterating his commitment to freedom of the media, the President said the government would continue to pursue the same policy.
Musharraf said Pakistan has effectively countered some misperceptions it faced until recent past and added that the international community has appreciated the country's policies.
In this context, he pointed out misperceptions on issues pertaining to acts of terrorism in Afghanistan, nuclear proliferation and "cross-border" infiltration, stating that a marked "change in the environment" has taken place now.
Pakistan, the President said, is a moderate progressive Islamic country and not a pro-extremism society and regretted that unfortunately the country suffers from a negative projection.
Musharraf said the media should project Pakistan as a moderate Islamic country where extremists exist only on the fringes.
On the issue of holding the office of Army Chief, the President said it should not be viewed as a personal matter but should be evaluated in the larger national context at a time when the country needs political stability, stable democracy, and is also striving for a societal change to contain extremism and continue its march on path of economic progress.
Speaking about Pakistan's growing water and energy requirements, he said the country needed four large dams for sustainable agricultural and industrial development.
Musharraf said the country would need all four reservoirs including Kalabagh, Bhasha, Akoro and Skardu dams.
"We have to take very serious decisions in this respect."
The province of Sindh, the President said, will benefit the most from the construction of a large dam.