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NEW DELHI (Reuters) - President Barack Obama called on India on Sunday to bolster peace efforts with Pakistan that have floundered since the 2008 Mumbai attacks, relations seen as crucial to his troubled efforts to win the war in Afghanistan.
On the second day of his official visit to India, Obama faces a diplomatic tightrope in fostering ties with the growing global power, while at the same time helping Pakistan with billions of dollars in aid and promoting wider peace in Afghanistan.
Obama's first leg of a 10-day Asian tour has been hailed as moving the United States closer to India as Washington tries to revive a weak economy and gather support to pressure China on its currency. But on Sunday, India's worries about Pakistan dominated.
Peppered by questions from students at a college in India's financial hub, Obama toed a cautious line between the two nuclear-armed foes, saying both were needed to help stabilize Afghanistan where thousands of U.S. troops battle militants.
"My hope is that over time, trust develops between the two countries, that dialogue begins, perhaps on less controversial issues, building up to more controversial issues," Obama told students under a hot midday sun.
Pakistan Foreign Ministry spokesman Abdul Basit was quoted by news agency Press Trust of India as saying the United States ought to play an "effective role for an amicable solution of the longstanding issue of Kashmir" given close India-U.S. ties.
Kashmir is at the heart of the dispute between the nuclear-armed rivals, who have fought two wars over the restive Himalayan region which they both claim.
The Mumbai attacks inflamed tensions between the foes, who have been to war three times since 1947 independence. India says elements within the Pakistan state were behind the rampage, when Pakistan-based gunmen killed 166 people in a 60-hour strike on hotels, a train station and a Jewish center.
India immediately broke off peace talks with Pakistan, although there have been some largely fruitless top level meetings in the last year.
"India's investment in development in Afghanistan is appreciated," Obama added. "Pakistan has to be a partner in this process, in fact all countries in the region are going to need to be partners in this process.
"The United States welcomes that, we don't think we can do this alone."
India has given $1.3 billion in aid to Afghanistan, a policy that unnerves Pakistan which sees its northern neighbor as its own backyard of influence. India wants stability there to stop the country being used to harbor anti-Indian Islamist militants.
Obama said Pakistan was not acting quickly enough to deal with militancy within its borders, a view long expressed by many Indian officials who say Islamabad is hoodwinking Washington by taking aid while also backing militants in Afghanistan.
"There are more Pakistanis who've been killed by terrorists inside Pakistan than probably anywhere else," Obama said.
Obama will visit Indonesia, South Korea and Japan on the tour that will see Washington push to prevent countries unilaterally devaluing currencies to protect their exports, a top theme at the Group of 20 heads of state meet in Seoul next week.
Mauled in mid-term elections, Obama is trying to bolster exports and jobs by boosting business in countries like India, trying to show that U.S. voters have more to benefit from India than fear from its cheap outsourcing industries.
To that end, Obama announced $10 billion in business deals that he said would support 54,000 jobs in the United States.
But on Sunday he called on Asian countries like India to open their economies more up to U.S. firms. India restricts foreign investment in key areas like retail and financial services.
"It's not unfair for the United States to say, look, if our economy is open to everybody, countries that trade with us have to change their practices to open up their markets to us. There has to be reciprocity in our trading relationships," Obama said.
He said the United States was not making progress on unemployment quickly enough and he would take "some mid-course correction" after the mid-term elections.
"Unemployment in the U.S. is very high now, relative to what it is typically. Although we are making progress, we are not making progress quickly enough," Obama said.
Earlier on Sunday Obama and is wife Michelle watched children in saris perform traditional dances. Michelle led an initially hesitant president to join in, mimicking their dancing moves as White House aides laughed at their commander-in-chief.
Later in the afternoon, Obama landed in New Delhi and greeted the waiting Prime Minister Manmohan Singh with a hug. The Obamas and the Singhs chatted with each other for a few minutes, before the president went for a scheduled tour of a Mughal-era tomb. The leaders were to meet for dinner at Singh's residence later.
Writing by Alistair Scrutton; Editing by Krittivas Mukherjee and Andrew Marshall