Pakistan decided Wednesday to normalize trade relations with India, granting it “most favored nation” status in a significant boost to bilateral ties and a sign of warming relations between the ­nuclear-armed neighbors.

The decision by the Pakistani military to drop its long-standing objection to closer trade ties with India was interpreted partly as a reflection of the parlous state of Pakistan’s economy and as a measure to counter Islamabad’s increasing diplomatic isolation.

The Indian government welcomed the news, as did business leaders on both sides of the border. Independent analysts in New Delhi described the move as a significant confidence-building measure rather than something that would resolve the fundamental conflict between the historical rivals, or more cynically as a “tactical retreat” by the Pakistani military rather than a strategic shift.

But there is little doubt that the atmospherics between the South Asian neighbors have improved since their foreign ministers promised a new era of more stable relations at a meeting in New Delhi in July.

U.S. Secretary of State Hillary Rodham Clinton also has welcomed the improvement in India-Pakistan relations in recent months, something the Obama administration hopes could contribute to greater stability in Afghanistan.

Rivalry between India and Pakistan has undermined prospects for peace in Afghanistan; Islamabad is suspected of backing the Taliban partly as a way to counter New Delhi’s influence there. An improvement in relations could help provide a more positive backdrop for the sort of regional cooperation that the United States and its Western allies sought to promote Wednesday at an Afghanistan-focused conference in Istanbul.

Trade ties between India and Pakistan had for decades been held hostage to political and military hostilities between the South Asian rivals, but the two countries agreed to move toward normalized trade relations at a meeting between their commerce ministers in late September.

On Wednesday, the Pakistani cabinet voted unanimously to grant most-favored-nation status to India, effectively giving Indian businesses lower tariffs and fewer trade barriers once the move takes effect.

India granted MFN status to Pakistan in 1996, but Islamabad had been reluctant to reciprocate until the long-running dispute over Kashmir was resolved.

Pakistani Information Minister Firdous Ashiq Awan said his country’s powerful military, which effectively dictates policy toward India, had agreed to Wednesday’s decision. The Foreign Ministry also welcomed it.

“Pakistan’s decision to grant MFN status to India will not only enhance trade relations, but it will also give impetus to an Indo-Pak peace process that has been marred by sluggishness,” said a Foreign Ministry official in Islamabad who was not authorized to give his name.

The peace process resumed this year after breaking off in 2008 in the wake of a terrorist attack on Mumbai that killed 166 people.

In recent weeks, India backed Pakistan’s bid for a non-permanent seat on the U.N. Security Council, and Pakistan backed India’s nominee for the Commonwealth secretary general’s role. When an Indian helicopter was forced to land in Pakistani territory because of bad weather last month, the crew was freed almost immediately — something that might not have happened in the past.

The move Wednesday to improve trade ties comes just ahead of an expected meeting between the two countries’ prime ministers at a regional summit in the Maldives, where officials hope more progress can be made.

“It is a positive step forward,” said Indian Commerce Minister Anand Sharma, adding that an improved economic climate would bolster the peace process. “It will help us in economic engagement, which has enormous potential and augurs well for the entire region.”

Islamabad has looked increasingly isolated in recent months, its relations deteriorating with the United States and souring with its western neighbor Afghanistan. In that context, acrimonious relations with India have seemed less attractive.

“Pakistan’s strained ties with the United States has pushed it to look for more foreign policy options, to go for increasing ties with friendly states in the neighborhood like China, and also to improve the relations with nuclear neighbor India,” said Hasan-Askari Rizvi, a Pakistani political and defense analyst.

The Federation of Indian Export Organizations said trade could double from current levels of about $2.7 billion a year simply by the rerouting of goods currently sent via Dubai, the United Arab Emirates, and through other channels. But the Confederation of Indian Industry cautioned that roadblocks such as stringent visa rules, non-tariff barriers and communications problems still need to be dismantled and more trade routes opened up.

Uday Bhaskar, an Indian defense and security analyst, gave the decision “two cheers,” reserving full judgment until MFN status is properly implemented “and I see trucks piling up at the border.”

Sundeep Waslekar of the Strategic Foresight Group in Mumbai said there was no sign of a strategic shift in thinking on either side of the border.

“This is a confidence-building measure rather than a conflict-resolution measure,” he said. “But anything that can reduce the trust deficit, I welcome as a citizen of South Asia.”

The two countries have fought three wars since 1947, two of them over the Himalayan region of Kashmir.

Denyer reported from New Delhi.