It will be a positive development if the two leaders do little else other than shake hands

The BBC's Alistair Lawson

Officials at the summit say it will focus on poverty and free trade but attention will be firmly fixed on the Indian and Pakistani leaders as they enter the same conference room.

Despite international calls for the leaders to hold direct talks, India has continually ruled out the possibility, saying the event is not the appropriate forum.

In fact, Mr Vajpayee, has held one-to-one meetings with leaders from every member of the South Asian Association for Regional Cooperation (Saarc) except Pakistan.

US Secretary Colin Powell has urged both leaders to hold face-to-face talks to defuse the crisis.

Click here for a map of the border area

Islamabad has criticised India's strategy and has repeatedly stressed that it is always willing to hold negotiations with India.

India has said Mr Vajpayee, will not meet with Mr Musharraf until Islamabad cracks down harder on Islamic militants Delhi blames for the deadly 13 December attack on parliament in New Delhi.

The troops are still being massed on the border

"It is not as if the door has been shut with Pakistan for a dialogue, but under the present circumstances, when the seat of a democracy was attacked, a certain threshold was crossed," Indian spokeswoman Nirupama Rao said.

The BBC's Alistair Lawson in Kathmandu says relations between the countries have become so tense since the attack many diplomats say it will be a positive development if the two leaders do little else other than shake hands.

Avoiding contact

The Kathmandu summit was postponed by a day when poor weather made Mr Musharraf several hours late in arriving on Friday.

The seven leaders held their first function together on Friday night when they dined at Nepal's royal palace, but Mr Musharraf and Mr Vajpayee did not make direct contact during the banquet, sources from the two countries said.

On Friday Pakistani police arrested large numbers of Islamic activists in what appeared to be a major operation against militant and sectarian groups.

In Kashmir frightened residents are continuing to flee

Pakistan is refusing to hand over a number of men India says were behind the parliament attack, saying it has received no evidence of their involvement.

Speaking in a BBC interview, Mr Powell welcomed steps taken by Mr Musharraf to defuse the crisis.

"I think he's done quite a bit but I expect him to do more," he said.

Clampdown

The BBC's Jonathan Head says the latest arrests are a well-timed move which suggest Mr Musharraf is serious about clamping down on militant organisations.

The new wave of police detentions - focusing on the province of Punjab - began on Thursday and will continue "for a couple of days more", a Pakistani police officer said.

The detainees include members of Lashkar-e-Toiba and Jaish-e-Mohammad - the two groups India says carried out the attack on its parliament with the support of Pakistan's intelligence services.

Since the attack, in which 14 people were killed, both sides have massed thousands of troops along their border.