Home minister P. Chidambaram on Friday said that India lives in the "most difficult neighbourhood" in the world as terrorism infrastructure in Pakistan has flourished "as an instrument of state policy".

Calling for stronger Indo-US ties to combat terrorism and other threats, Chidambaram stressed on the need for a "stable, peaceful and prosperous neighbourhood" for the security of the people of India.

"It is a truism to say that India lives in perhaps the most difficult neighbourhood in the world. The global epicentre of terrorism is in our immediate Western neighbourhood.

"The vast infrastructure of terrorism in Pakistan has for long flourished as an instrument of state policy," he said in his opening remarks at India-US homeland security dialogue being held here.

Terming terrorism as the "principal challenge" for both the countries, the home minister advocated the need to deal with a range of other challenges, including counterfeit currency, narcotics trafficking, threats and risks in cyber space.

"Today, different terrorist groups, operating from the safe havens in Pakistan, are becoming increasingly fused. The society in Pakistan has become increasingly radicalised. Its economy has weakened and the state structure in Pakistan has become fragile.

"Given the complexity of our region, our government has a comprehensive neighbourhood strategy that is based on political engagement, especially with Pakistan, support for political stability, assistance for economic development and improved connectivity and market access for our neighbours to the Indian economy," Chidambaram said.

"A stable, peaceful and prosperous neighbourhood is vital for the security of the people of India," he said.

During the bilateral dialogue with his American counterpart Janet Napolitano, Chidambaram said, "A strong and effective India-US cooperation in homeland security and counter-terrorism is indispensable for our strategic partnership.

"One of the key elements of the India-US relationship is our engagement on the issue of terrorism and on counter-terrorism cooperation. Dealing with the challenge of terrorism is a priority for the people of India. There has always been great public and political expectation about India-US cooperation on counter-terrorism.

"This is because of our shared values, the growth of strategic partnership between our two countries, US expertise and capabilities, and the perception in India that the United States exercises a strong influence on the country that is the hub of global terror," the home minister said.

Chidambaram also appreciated the US efforts to bring the perpetrators of Mumbai terror attack, and others associated with it, to justice.

"Our cooperation must cover all aspects of the challenges that we face (by) anticipating and predicting threats, taking preventive or pre-emptive measures, or responding effectively and quickly to incidents.

"Therefore, we must further deepen our ties in intelligence, information and assessment sharing, cooperation in investigations and forensics, protecting cities, infrastructure, people and trade and developing capabilities," he said.

The home minister proposed a meeting between home secretary and the US deputy secretary for homeland security after six months to review progress.