The neighbors have in the past exchanged almost daily fire across what is known as the Line of Control separating the two armies in Kashmir, but the latest incident occurred in the Sialkot sector of Pakistan which rarely experiences trouble.
A spokesman for the Pakistan Rangers said Indian border security forces fired automatic weapons and mortars at a village along the Sialkot working boundary, north of the Pakistani city of Lahore.
"First they fired yesterday morning and then again in the evening and the firing continued sporadically throughout the night until Wednesday morning," said Nadeem Raza.
"One of our soldiers and several villagers have been wounded in the Indian firing." A senior Indian border official confirmed the incident but said Indian forces retaliated for "unprovoked firing" from the Pakistani side.
"We were facing unprovoked firing from the Pakistani side for the last two days, resulting in the death of two of our men. We were forced to retaliate," said K. Srinivasan. "The firing was precise, but at this stage we cannot say for sure who fired at us."
The flare-up comes ahead of Indian Foreign Minister S.M. Krishna's trip to Pakistan next week to meet with his counterpart in a renewed bid to normalize ties.
Relations between the nuclear-armed neighbors, who have fought three wars since 1947, were frozen when Pakistan-based militants attacked the Indian city of Mumbai in 2008, killing 166 people.
A late 2003 cease-fire between the two sides across the cease-fire line in Kashmir has largely held although there have been several exchanges of fire over the past year.
Raza said Pakistani forces returned fire after Indian forces "did not respond to the call for a flag-meeting" and continued firing.
The Director General of Pakistan Rangers in Punjab, Major General Yaqub Khan, said a protest had been lodged with Indian forces.
"In future, a strong reply will be given by Rangers and loss of civilian lives and property will not be tolerated at any cost," he was quoted as saying in a statement issued after visiting the area.
This was the third violation of a cease-fire in that area in the last two weeks, according to the statement.
India has long accused Pakistan of backing militants fighting Indian security forces in the Himalayan region of Kashmir.
Pakistan supports what it calls a freedom struggle by the people of Kashmir against what it sees as the brutal and illegitimate Indian occupation of the region.
But it denies arming the guerrillas, who have been fighting Indian forces since 1989.
