He was speaking at a peace conference in Delhi where former Pakistani leader Benazir Bhutto was among the guests.

Also on Friday, the current Pakistani President, Pervez Musharraf, said his country faced no major external threat.

India and Pakistan have recently taken tentative steps towards peace to end nearly two years of hostility between the two nuclear powers.

Single currency?

Mr Vajpayee said with closer economic ties, South Asian countries could put aside differences and jointly tackle issues such as drug trafficking, money laundering and smuggling.

"Once we reach that stage, we would not be far from mutual security co-operation, open borders and even a single currency," he said.

"Let us remember that the world did not anticipate the sudden end to the Cold War or the collapse of the Berlin Wall," he added.

The Indian prime minister is due to travel to Pakistan in January to attend a South Asian regional summit.

Tensions have eased between India and Pakistan

It will be his first visit to that country since 1999, after which relations between the two countries went into a deep freeze.

A summit in 2001 held in the city of Agra failed to bridge the divide but in the past few months, both sides have signalled there intent to make a fresh attempt.

The tension between Delhi and Islamabad has spiked attempts at regional economic co-operation and attempts at building a free trade zone.

A large percentage of trade between the two countries takes place through third party channels, increasing costs.

'Eating us like termites'

In Pakistan, President Musharraf on Friday launched the country's first indigenously built submarine.

He used the occasion to make a speech in which he said that Pakistan's main threat came from religious extremism and sectarianism.

"We don't face any external threat," he said.

"This menace of extremism is eating us like termites. All Muslims are facing a threat because of it," he said.

The president recently banned six radical Islamic groups, including a couple who operate in Indian-administered Kashmir.

Pakistan also announced a ceasefire along the Line of Control, which divides the disputed region between the two countries.