The 53-year-old junior diplomat working in the information service of the high commission was called back to New Delhi last week on the pretext of consultations before police swooped on her at home.

The woman, identified as Madhuri Gupta, a second secretary in the high commission, was arrested for breaching the Official Secrets Act, which carries a minimum 10-year jail term, a senior police source said on condition of anonymity.

"We have reason to believe that an official in the High Commission of India in Islamabad had been passing information to the Pakistani intelligence agencies," Foreign Ministry spokesman Vishnu Prakash told reporters.

"The official is cooperating with our investigations and enquiries," he said in a statement made on the sidelines of a regional conference in Bhutan where the prime ministers of India and Pakistan were set to hold talks.

The proposed meeting between Manmohan Singh and Yousaf Raza Gilani, on the sidelines of the two-day South Asian Association for Regional Cooperation (SAARC) summit, is seen as part of the long process of building trust. India broke off all dialogue with Pakistan after the 2008 Mumbai attacks, which killed at least 166 people and which New Delhi blamed on Pakistan-based militants.

The police source said Gupta had been under surveillance for six months. The Press Trust of India news agency said she had worked in the mission for nearly three years and is alleged to have passed on information from the Islamabad head of India's external intelligence service.

The station head of the intelligence service, the Research and Analysis Wing, R.K. Sharma, was also under scrutiny in connection with Gupta's arrest, PTI said.

K.C Singh, a former Indian foreign secretary, told the Times Now news channel that Gupta would in theory have had limited access in her role in the information wing. As a second secretary, she ranked low in the diplomatic hierarchy, senior only to the entry-level third secretary.

"More damage is done if it is someone in the political wing," he said. "However, it is a penetration. We earlier had penetration by the US and East Europeans, but this is a first from Pakistan."

Arun Bhagat, a former chief of India's powerful Intelligence Bureau, called the arrest "a matter of shame."

A meeting between Singh and Gilani in Thimphu is seen as crucial because it would help keep engagement alive between the two nuclear-armed neighbors who have a long tradition of hostility. The two countries' battle for influence in Afghanistan also has a direct bearing on Western efforts to stabilize a region with 1.8 billion people.

The top diplomats of the two countries met in New Delhi in February this year but failed to achieve a breakthrough. That meeting, nonetheless, was seen as a small step toward repairing ties.

The United States has been urging the two sides to reduce tension so that Pakistan can focus on fighting the Taleban on its western border with Afghanistan.