By Sanjeev Miglani and Asad Hashim

NEW DELHI/ISLAMABAD (Reuters) - Indian officials said elite troops crossed into Pakistan-ruled Kashmir on Thursday and killed suspected militants preparing to infiltrate and carry out attacks on major cities, in a surprise raid that raised tensions between the nuclear-armed rivals.

Pakistan said two of its soldiers were killed in exchanges of fire, but denied India had made any targeted strikes across the de facto frontier that runs through the disputed Himalayan territory.

An Indian military source and a government official said Indian special forces crossed the heavily militarized border by foot just after midnight and hit about half a dozen "launching pads", where suspected militants were preparing to sneak across.

The official said troops killed militants numbering in the double digits, and that no Indian soldier was killed.

An army official based in Indian-controlled Kashmir said two Indian soldiers were wounded while returning from the raid - one stepped on a landmine and another was shot.

Pakistan also captured an Indian soldier on its side of the border, military officials from both countries said. An Indian army official said the soldier had inadvertently crossed the frontier and had nothing to do with the earlier raids.

Thursday's strikes mark a rare public announcement by India that it had launched a military operation across its de factor border with Pakistan.

They followed Prime Minister Narendra Modi's warning that those India held responsible "would not go unpunished" for a Sept. 18 attack on an army base in Uri, near the Line of Control, that killed 18 soldiers.

The strikes raised the possibility of military escalation between the neighbors that could wreck a 2003 Kashmir ceasefire.

India evacuated people from villages within 10 km (six miles) of the de facto border in the Jammu area as a precautionary measure.

Share markets in India and Pakistan fell after India announced the strikes at a hastily called press conference.

In Washington, the White House urged India and Pakistan to avoid escalation.

White House spokesman Josh Earnest said reports indicated the Indian and Pakistani militaries had been in communication with each other and added: "We encourage continued discussions ... to avoid escalation."

Earnest said Susan Rice, the U.S. national security adviser, had spoken to her Indian counterpart on Wednesday and made clear Washington was "concerned by the danger that cross-border terrorism poses." He said he could not speak to "any specific coordination" between Delhi and Washington.

Earnest said the United States was also in close contact with Pakistan.

U.S. ambassador to India, Richard Verma, canceled a Washington speaking engagement on Thursday to return to New Delhi. "Obviously it's a very dynamic situation and he felt it was prudent to go back," U.S. State Department spokesman John Kirby told a regular news briefing.

Kirby said U.S. Secretary of State John Kerry had spoken to Indian External Affairs Minister Sushma Swaraj on Tuesday and cautioned then against escalation.

Kirby declined to say whether the United States was informed of the strikes in advance. But at the same time, he said the United States continued to urge action against Pakistan-based militant groups such as Lashkar-e-Taiba, Jaish-e-Mohammed and the Haqqani network.

Lieutenant General Ranbir Singh, the Indian army's director general of military operations (DGMO), said the strikes were based on "specific and credible information that some terrorist units had positioned themselves ... with an aim to carry out infiltration and terrorist strikes".

Singh said he had called his Pakistani counterpart to inform him of the operation. India later briefed opposition parties, which backed the mission, as well as about 25 foreign envoys, but did not disclose operational details.

"It would indicate that this was all pretty well organized," said one diplomat, who spoke on condition of anonymity because the briefing by Foreign Secretary Subrahmanyam Jaishankar was confidential.

"A BASELESS LIE"

Pakistan's military spokesman dismissed the Indian account as "totally baseless", saying the contact between DGMOs only included communication regarding cross-border firing, which was within existing rules of engagement.

"We deny it. There is no such thing on the ground. There is just the incident of the firing last night, which we responded to," Lieutenant General Asim Bajwa told Geo TV.

The border clash comes at a delicate time for Pakistan, with powerful Chief of Army Staff General Raheel Sharif to retire soon and Prime Minister Nawaz Sharif still to decide on a successor.

The Pakistani premier condemned India's "unprovoked and naked aggression" and called a cabinet meeting on Friday to discuss further steps.

Neither side's accounts could be independently verified. The Indian government official briefed on the operation declined to offer more evidence about how the strikes were carried out or what the militants were planning to do.

India's disclosure of such strikes was unprecedented, said Ajai Sahni of New Delhi's Institute for Conflict Management, and sent a message not only to its own people but to the world.

"India expects global support to launch more focused action against Pakistan," Sahni said. "There was tremendous pressure on the Indian prime minister to prove that he is ready to take serious action."

Jammu and Kashmir Chief Minister Mehbooba Mufti warned that the confrontation could be disastrous if urgent steps were not taken to reduce tensions.

"New Delhi and Islamabad must open the channels of communication, realizing the dangerous consequences of any escalation of ongoing confrontation along the borders," she said.

HEAVY ARTILLERY FIRE

Indian officials said the strike targeted areas close to the Line of Control, where it believes militants congregate for their final briefings before sneaking across the border.

An Indian security source said the operation began with Indian forces firing artillery across the frontier to provide cover for three to four teams of soldiers to cross over at points several km (miles) apart.

The operation was over before sunrise, the official said.

A Pakistani military officer at Chhamb, near the Line of Control, contradicted the Indian version, saying the attack had been repelled.

Both India and Pakistan claim Kashmir in full, but govern separate parts, and have fought three wars since independence from Britain in 1947, two of them over Kashmir.

Tensions have been high since an Indian crackdown on dissent in Kashmir following the killing of a young separatist leader by security forces in July.

They rose further when New Delhi blamed Pakistan for the Uri attack, which inflicted the heaviest toll on the Indian army in a single incident in 14 years.

India, which had already launched a diplomatic drive to isolate Pakistan, said on Wednesday it would boycott a regional summit hosted by Pakistan in November.

(Writing by Douglas Busvine, Paritosh Bansal and Tommy Wilkes; Additional reporting by Fayaz Bukhari in SRINAGAR, Paritosh Bansal, Rupam Jain and Tommy Wilkes in NEW DELHI, Drazen Jorgic and Mehreen Zahra-Malik in ISLAMABAD and David Alexander and David Brunnstrom in Washington; Editing by Andrew Heavens and Tom Brown)