By Zeeshan Haider

ISLAMABAD (Reuters) - Pakistan and India made no progress at the end of two days of talks on Sunday aimed at resolving a boundary dispute over an estuary that has hampered exploration of possible offshore oil and gas deposits.

But they agreed to continue negotiations, according to a joint statement issued after the talks on a dispute over the Sir Creek estuary in the Arabian Sea.

Discussions were held "in a frank and cordial atmosphere", the statement said after the talks in the city of Rawalpindi adjoining Islamabad.

They followed two days of negotiations on a separate standoff over Siachin Glacier, the world’s highest battlefield, which also ended without concrete progress.

The estuary in the Rann of Kutch lies between India’s western state of Gujarat and Pakistan’s southern Sindh province.

India claims the boundary should lie in the middle of the 100-km estuary, basing its claim on accepted practice as well as pillars built down the middle of part of the channel during British colonial rule.

Pakistan says the border should lie on the southeastern bank of the creek, basing its claim on a line shown on a map drawn up by the British governor of Bombay in the early 20th century.

The dispute has prevented the two sides agreeing on their maritime boundaries and hampered offshore exploration in an area thought to hold oil and gas deposits.

The two sides must submit their maritime boundaries to the United Nations by 2009 in order to claim exclusive economic rights over waters 350 km offshore, as part of international efforts to demarcate the continental shelf.

The last round of talks on the Sir Creek estuary were in August last year in New Delhi.

GOOD ATMOSPHERE, MANY DIFFICULTIES

Analysts say the lack of progress in the talks shows that, despite embarking on a tentative peace process, mistrust between the South Asian rivals exists after decades of enmity and war.

But Indian Prime Minister Manmohan Singh said the relations between the two countries, which have fought three wars mainly over the disputed region of Kashmir, should improve despite difficulties.

"I feel the atmosphere is good but there are many difficulties. Our effort would be to make sincere efforts to overcome those difficulties," Singh told a news conference in the northern hill resort of Shimla.

The peace process, launched last year after the two nuclear rivals went to the brink of war in 2002, have moved slowly, but a meeting in New Delhi between Pakistani President Pervez Musharraf and Singh in April raised hopes.

The start of bus service across the Kashmir ceasefire line days earlier, was the biggest achievement so far.

But Pakistani officials have accused India of dragging its feet when it comes to addressing the core issue of Kashmir.

Pakistan is hoping a visit next week by separatist leaders from Indian-held Kashmir will get a three-way dialogue going to decide Kashmir’s future.

But a hardline faction of the separatists’ alliance rejected on Sunday an invitation to visit Pakistan. The moderate faction has announced its leaders would travel to Pakistan on June 2.

(Additional reporting by Y.P. Rajesh in NEW DELHI)