* Diplomatic row likely to hurt intelligence sharing
* But UK-Pakistan ties too close for long-term damage
* Pakistan Army wants its view on India to be heard
* British Pakistanis have close links to Kashmir
By Myra MacDonald
LONDON, Aug 8 (Reuters) - A diplomatic row between Britain and Pakistan over its approach to Islamist militants will hurt intelligence sharing, though in the longer term the ties between the two countries are too tight for it to cause lasting damage.
Analysts say remarks made last month in India by Prime Minister David Cameron that Pakistan must not "look both ways" in dealing with militants has caused deep resentment in the Pakistan Army and its Inter-Services Intelligence (ISI) agency.
That is unlikely to be alleviated by talks in Britain last week between President Asif Ali Zardari and Cameron, who spoke of an "unbreakable relationship between Britain and Pakistan".
With the army, rather than the civilian government, controlling security policy in Pakistan, it is expected to show its anger by quietly dragging its heels on intelligence sharing needed to head off acts of terrorism in Britain.
That was highlighted when an ISI official said its chief was cancelling a trip to Britain in protest at the remarks, which hit a particularly raw nerve since they were made in India.
"Cameron’s statement has not made the Pakistanis anxious to play along," said Brian Cloughley, a defence specialist who has written two books about the Pakistan Army.
"They’ll have to, of course, but there are quiet ways of demonstrating unwillingness and ratcheting down the level of liaison -- such as cancelling the ISI visit to London."
Cameron’s remarks also raised fears of a tilt towards India as his government seeks business opportunities in expanding emerging markets to help the struggling economy at home.
"The ISI head General (Ahmad Shuja) Pasha’s reported cancellation of his visit to the UK is a sign of how badly Prime Minister Cameron’s remarks played in the military," said Shuja Nawaz at The Atlantic Council of the United States.
"Many perceive the prime minister pandering to his hosts."
But the two countries have too much at stake to abandon cooperation -- from the war in Afghanistan to the powerful bonds between Pakistan and the British Pakistani community.
Quite how tight those bonds are was highlighted by Zardari’s visit, when despite coming under fire for being away during Pakistan’s floods, he decided to go ahead with a big political rally on Saturday for British supporters of his ruling Pakistan People’s Party -- a rare event for a visiting head of state.
"The reality is that the UK and Pakistan are inextricably linked by virtue of the near to one million British Pakistani community," said Nigel Inkster at London’s International Institute for Strategic Studies. "So I would expect co-operation to resume after a brief pause."
BALANCING PAKISTAN AND INDIA
Cameron’s comments were not particularly new, and nor did he say anything in public that is not already said in private.
Pakistan has long been accused of being selective in its approach to Islamist militants, fighting some while retaining links to others who can be used to counter India, either in Afghanistan or Kashmir.
But his critics have accused him of naivety for making them in India, while also carefully eschewing any reference to the need to settle the 60-year-old Kashmir dispute which has traditionally shaped Pakistan’s approach to Islamist militants.
Britain in the past has tried to avoid being seen to take sides, pressing Pakistan to tackle militants while quietly encouraging India to hold talks over Kashmir. And though very much a junior partner to the United States, it has always played a strong role in South Asian diplomacy.
Pakistan’s security establishment is now likely to drag its feet on counter-terrorism cooperation to force Britain’s new government to pay attention to its point of view on India and to acknowledge what it is already doing to fight militants, said Kamran Bokhari at global intelligence firm STRATFOR.
"If you have the British listening to you, it helps in shaping American perceptions," he said. "Britain is a very key ally of the U.S."
Under the previous government, Britain was generally supportive of the idea of reconciliation with the Afghan Taliban -- an idea promoted by Pakistan.
It also has a stake both in seeing peace over Kashmir and in the dismantling of militant groups nurtured in the past by the ISI to fight Indian rule there.
Much of the British Pakistani community is from what was once the princely state of Jammu and Kashmir, and for the few drawn to Islamist militancy, the Kashmir-focused groups are an obvious training ground for those planning terrorism at home.
In the past, diplomats say, Britain has tried to encourage India to make peace with Pakistan by reassuring it that it is not alone in wanting groups like the Lashkar-e-Taiba -- blamed for the 2008 attack on Mumbai -- closed down.
But it has also tempered that with caution that if Pakistan were to act too quickly against such groups, they could become even more dangerous, splintering into more radical factions.
The signs are that is already happening.
"The ISI maintains close contact with such groups via S Wing, made up of retired officers for the purposes of plausible deniability, but it no longer funds them and with the loss of funding has come a loss of control," said Inkster.
"Until now indigenous jihadist groups have been broadly supportive of the Pakistani state but we are now starting to see a younger generation of jihadists turning their guns against their own government." (Editing by Jon Boyle)