ISLAMABAD - Pakistan will increase defense spending by 15.3 percent in the 2009/10 fiscal year as it battles Taliban insurgents in the northwest on the border with Afghanistan.

Pakistani forces launched a major offensive in late April to expel Taliban from the Swat valley and neighboring districts northwest of Islamabad, and have in recent days stepped up attacks on the militants on the western border.

Defense spending is set to rise to 342.9 billion rupees ($4.2 billion) for the 2009/10 fiscal year beginning on July 1, compared with 296.07 billion rupees allocated in 2008/09.

Pakistan today is not only a front-line state in the war against terrorism but is also battling militancy and terrorism inside the country, Minister of State for Finance Hina Rabbani Khar told parliament in her budget speech.

We have already paid an economic price of more than $35 billion in the war against terrorism ... we are facing huge expenditures to get rid of militancy, she said.

Pakistan raises its defense spending every year because of its historically uneasy relations with old rival India, with which it has fought three wars since their independence from British colonial rule in 1947.

Talat Masood, a retired general turned security analyst, said India would remain a security concern as long as the nuclear-armed neighbors fail to resolve differences, in particular their core dispute over the divided Kashmir region.

But he said much of the increase in the defense budget in the new fiscal year would be spent on the fight against Islamist militants.

This increase in the defense budget will primarily be used to meet the growing threat on the western border and expanding the engagement of the military in the northwest, Masood said.

VITAL U.S. ALLY

Pakistan is vital for U.S. efforts to defeat al Qaeda and the Taliban in neighboring Afghanistan and Washington has funneled $10 billion in aid to Islamabad over the past eight years.

On Thursday, the U.S. House of Representatives approved tripling aid to Pakistan to about $1.5 billion a year for five years to help combat extremism through development. Pakistan is now the biggest recipient of U.S. aid.

Tension sharply rose between Pakistan and India after November attacks on the Indian financial capital of Mumbai, which India blamed on Pakistan-based militants.

Pakistan has acknowledged that the attacks were launched and partly planned from its territory and authorities have lodged police complaints against eight suspects and promised to prosecute them.

India put a pause on slow-moving peace talks between the two countries after the Mumbai attacks but there are signs of a thaw.

Pakistani President Asif Ali Zardari and Indian Prime Minister Manmohan Singh, buoyed by a resounding victory in last month's election, are expected to meet on the sidelines of a regional conference in Russia next week.

The fighting in northwest Pakistan has forced about 2.5 million people from their homes and Khar said 50 billion rupees was being set aside for help for them.

(Editing by Robert Birsel)

Pakistan India Afghanistan