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MUMBAI (Reuters) - The fallout from a three-day rampage that killed nearly 200 people in Mumbai threatened on Sunday to unravel India's improving ties with Pakistan and prompted the resignation of India's security minister.
New Delhi said it was raising security to a "war level" and had no doubt of a Pakistani link to the attacks, which unleashed anger at home over the intelligence failure and the delayed response to the violence that paralyzed India's financial capital.
Officials in Islamabad have warned any escalation would force it to divert troops to the Indian border and away from a U.S.-led anti-militant campaign on the Afghan frontier.
Newspaper commentaries blasted politicians for failing to prevent the attacks and for taking advantage of its fallout before voting in Delhi on Saturday and national polls due by May.
Indian Prime Minister Manmohan Singh said he would boost and overhaul the nation's counterterrorism capabilities, an announcement which came after Federal Home Minister Shivraj Patil resigned over the attacks.
"We share the hurt of the people and their sense of anger and outrage," Singh said. "Several measures are already in place ... But clearly much more needs to be done and we are determined to take all necessary measures to overhaul the system," he said.
Air and sea security would be increased, and India's main counter-terrorist National Security Guard would be increased in size and given more regional bases, he said in a statement.
Singh also named Finance Minister Palaniappan Chidambaram -- much derided as finance minister but respected for his work overhauling India's security agencies as a junior minister in the 1990s -- to take over Patil's job.
Singh, an economist by training, will take over the finance portfolio for now, the government said.
Analysts said they expect India's financial markets to get a boost from the personnel changes.
"Markets will rejoice," Arum Kejriwal, a strategist at research firm Kris, said of Chidambaram and Patil. "People will accept that the government has removed two non-performers and this can positively influence the markets."
Indian stocks closed up marginally after markets opened on Friday, the first time since the attacks, while the rupee fell. But analysts said it had already been under pressure.
Indian officials have said most, if not all, of the 10 Islamist attackers who held Mumbai hostage came from Pakistan.
The tension between the nuclear rivals has raised the prospect of a breakdown of peace efforts going on since 2004. The two nations have fought three wars since 1947, when Muslim Pakistan was carved out of Hindu-majority India.
They went to the brink of a fourth conflict after a 2001 militant attack on the Indian parliament which New Delhi also blamed on Pakistan.
"We will increase security and strengthen it at a war level like we have never done it before," Sriprakash Jaiswal, India's minister of state for home affairs, told Reuters on Sunday.
"They can say what they want, but we have no doubt that the terrorists had come from Pakistan," Jaiswal said.
An official in Islamabad said the next one to two days would be crucial for relations. Pakistan has condemned the assaults and denied any involvement by state agencies.
The three-day rampage and siege in Mumbai turned India's financial and entertainment hub into a televised war zone.
On Sunday, the smell of disinfectant was strong outside Cafe Leopold, and the sidewalk wet from mopping -- a different sight from Wednesday night, when blood-splattered shoes and napkins lay strewn among broken furniture and glass.
It opened briefly before police came and shut it down again, saying investigations needed to be completed first.
Elsewhere in the trendy Colaba district where the fighting took place, shops were open and traffic flowed despite police barricades and heavy clean-up work around the Taj Mahal hotel, a 105-year-old landmark and site of the longest siege.
Broken windows were boarded up and firemen used a crane to reach the sixth floor, gutted by a fire set by the militants as they fought dozens of commandos in the corridors.
Elite Black Cat commandos killed the last of the gunmen on Saturday after three days of room-to-room battling inside the Taj, one of several landmarks struck in coordinated attacks on Wednesday night.
Hundreds of people, many of them Westerners, were trapped or taken hostage as the gunmen hurled grenades and fired indiscriminately. At least 22 of those killed were foreigners, including businessmen and tourists.
Nine gunmen and 20 police and soldiers were also killed. A tenth militant was caught alive.
On Saturday, India's navy and coast guard boosted coastal patrols, after evidence mounted that the attackers had come by boat to Mumbai from Karachi, Pakistan's main port.
India's Home Ministry said the official toll in Mumbai was 183 killed. Earlier, Mumbai disaster authorities said at least 195 people had been killed and 295 wounded.
Reporting by New Delhi, Mumbai and Islamabad bureaux; Writing by Bryson Hull; Editing by Diana Abdallah