Ties seemed to warm when Indian PM Narendra Modi (R) invited Nawaz Sharif to his swearing-in ceremony
India has cancelled talks with Pakistan after accusing it of interfering in India's internal affairs.
It comes after Pakistan's high commissioner in Delhi consulted Kashmiri separatist leaders ahead of the talks, which were agreed in May.
The two countries' foreign secretaries were to meet next week in Islamabad to discuss the resumption of formal dialogue.
Pakistan described the Indian decision as a "setback".
"It is a longstanding practice that, prior to Pakistan-India talks, meetings with Kashmiri leaders are held to facilitate meaningful discussions on the issue of Kashmir," a statement from the Pakistani foreign ministry said.
Relations seemed to be on the up when new Indian PM Narendra Modi invited his Pakistani counterpart to his swearing-in ceremony.
But, say correspondents, the cancellation is an indication of the tough new approach adopted by his government towards Pakistan.
Last week Mr Modi accused Pakistan of waging a proxy war against India in Kashmir.
'Unacceptable'
Pakistan's High Commissioner Abdul Basit announced plans to meet Kashmiri separatists in Delhi last week.
On Monday, Indian Foreign Secretary Sujatha Singh warned Mr Basit against it, saying he could either have a dialogue with India or talk with the separatists.
India reacted with fury when it became clear the Pakistani envoy had gone ahead with the consultation.
India's Foreign Ministry spokesman Syed Akbaruddin said Delhi told Mr Basit "that Pakistan's continued efforts to interfere in India's internal affairs were unacceptable".
He added that the action "raises questions about Pakistan's sincerity and undermines the constructive diplomatic efforts" initiated by India.
"No useful purpose" would be served by the foreign secretary's visit to Islamabad, the spokesman said.
Reports said Mr Basit was scheduled to meet more Kashmiri separatist leaders on Tuesday.
The US has described the cancellation of talks as "unfortunate". A State Department spokesman said it was "important that both sides still continue take steps to improve relations".
India has long accused Pakistan of sponsoring militants in the disputed region - though despite a recent spike, overall the violence has declined since the early 2000s.
Relations plunged again over the deadly 2008 Mumbai attack.
Claimed by both countries in its entirety, Kashmir has been a flashpoint for more than 60 years. The South Asian rivals have fought two wars and a limited conflict over the region.
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