Vehicles set alight by demonstrators are pictured during a protest against the attack on a bus that killed 44 Central Reserve Police Force (CRPF) personnel in south Kashmir. Picture: Reuters/Mukesh Gupta

New Delhi - New Delhi on Friday revoked trade privileges given to Islamabad and warned of more tough consequences after the single deadliest attack in Kashmir claimed the lives of at least 40 paramilitary troopers.

A militant from the Pakistan-based Islamist Jaish-e-Mohammad group rammed a explosives-laden vehicle into a convoy near Srinagar, the state capital of Indian-administered Kashmir, on Thursday. More than 20 soldiers were injured and hospitalised in the attack.

A cabinet meeting chaired by Premier Narendra Modi on Friday decided to take all possible steps to ensure Pakistan's "isolation in the international community for having actively participated and encouraged this act of terrorism," finance minister Arun Jaitley said.

Addressing a gathering later, Modi warned that those behind the attack would pay a "very heavy price" and had made a "big mistake."

India had also decided to withdraw the Most Favoured Nation status to Pakistan, which removes trade barriers that allow easy export of Pakistani goods into India, Jaitley said.

Pakistan has said it was gravely concerned by the attack but rejected allegations that it was responsible in any way.

Nuclear-armed India and Pakistan administer separate portions of Muslim-majority Kashmir, but both claim the region in its entirety and have fought two wars over it.

India claims Pakistan aids and abets militancy in Kashmir, a charge Islamabad denies. It calls militants freedom fighters.

Thursday's attack represents the single deadliest militant attack in Kashmir since insurgency against Indian rule erupted in 1989.

The attack has been condemned worldwide including by the United States and the UN Secretary-General Antonio Guterres.