Pakistan is preparing international legal action over India's suspension of a key river water-sharing treaty, a government minister told Reuters, as tensions intensify between the neighbours following an attack on tourists in India-administered Kashmir.

A top Pakistan defense official warned of the possibility of war with India but said it can be averted, as tensions rise over last week's terrorist attacks in the northern region of Kashmir that killed 26 people.

India blames Pakistan for an attack on its tourists and threatens to disrupt Pakistani water supplies. Islamabad says that move would be an act of war.