Pakistan says it has shot down two India Air Force jets in its airspace in Kashmir and arrested one pilot on the ground.
It comes a day after Indian warplanes struck inside Pakistan for the first time since a war in 1971, prompting leading powers to urge the nuclear armed rivals to show restraint.
Tensions have been elevated since a suicide car bombing by Pakistan-based militants in Indian-controlled Kashmir killed at least 40 Indian paramilitary police on 14 February, but the risk of conflict rose dramatically yesterday when India launched an air strike on what it said was a militant training base.
The attack targeted the Jaish-e-Mohammed militant, the group that claimed credit for the suicide attack.
But while India said a large number of JeM fighters had been killed, Pakistani officials said the Indian airstrike was a failure and inflicted no casualties.
Indian air force planes strayed into Pakistani airspace today after Pakistan had carried out airstrikes in Indian-occupied Kashmir, said Major General Asif Ghafoor, a spokesman for the Pakistan armed forces.
"PAF shot down two Indian aircrafts inside Pakistani airspace," he said in a tweet.
One of the aircraft fell on India's side of Kashmir, while the second came down in Pakistani-held territory, and its pilot was captured, he added.
Pakistan's information ministry has published a video purporting to show one of the Indian pilots that the Pakistani military says it has captured.
In the video, the pilot - who is blindfolded and appears to have blood on his face - identifies himself as Wing-Commander Abhi Nandan.
A spokesman for India's defense ministry was not immediately available for comment.
Police officials in Indian-occupied Kashmir said that two Indian pilots and a civilian had died after an Indian air force plane crashed in Kashmir, but did not confirm if the plane had been shot down by Pakistani forces.
Indian officials said three Pakistani jets had also entered Indian airspace, before being intercepted and forced turned back.
The Indian air force has ordered Kashmir's main airport in Srinagar along with at least three others in neighboring states to be closed because of the two incidents, an official said.
Yesterday, Pakistan began shelling using heavy caliber weapons in 12 to 15 places along the de facto border in Kashmir, known as the Line of Control (LoC), a spokesman for the Indian defense forces said.
"The Indian Army retaliated for effect and our focused fire resulted in severe destruction to five posts and number of casualties," the spokesman said.
Five Indian soldiers suffered minor wounds in the shelling that ended on Wednesday morning, he added.
"So far there are no [civilian] casualties but there is panic among people," said Rahul Yadav, the deputy commissioner of the Poonch district where some of the shelling took place.
"We have an evacuation plan in place and if need arises we will evacuate people to safer areas," he said.
Local officials on the Pakistani side said at least four people had been killed and seven wounded, though it was unclear if the casualties were civilian or military.
India has also continued its crackdown on suspected militants operating in Kashmir, a mountainous region that both countries claim in full but rule in part.
On Wednesday, security forces killed two Jaish militants in a gun battle, Indian police said.
'You all know what that means'
Meanwhile, Prime Minister of Pakistan Imran Khan will stage an emergency parliamentary session and meet with the body in control of Islamabad's nuclear arsenal
The two nuclear-armed neighbours have fought three wars since partition in 1947, and the majority of them have been over Kashmir - a territory both India and Pakistan claim in full.
Pakistan's National Security Committee (NSC), comprising top officials including Mr Khan and army chief Qamar Javed Bajwa, said the prime minister would "engage with global leadership to expose irresponsible Indian policy".
An NSC meeting ended with a warning Pakistan would "respond at the time and place of its choosing".
A government spokesperson added that a command and control authority meeting, which decides over the use of nuclear weapons, had been convened for Wednesday, and noted: "You all know what that means."
Pakistan's Foreign Minister Shah Mahmood Qureshi said India had "resorted to a self-serving, reckless and fictitious claim", pointing to elections due in India in May.
Indian Prime Minister Narendra Modi did not directly mention the air strikes when he addressed a political rally in Rajasthan on Tuesday but he told crowds: "I understand your enthusiasm and your energy. Today is a day we bow before our heroes."
Prime Minister Imran Khan has summoned special meeting of NCA on 27 Feb 2019. PM has directed that elements of national power including the Armed Forces and the people of Pakistan to remain prepared for all eventualities.— PTI (@PTIofficial) February 26, 2019
Amid fears of escalation, the European Union urged "maximum restraint" from both sides, with China making a similar plea.
Foreign Affairs Minister Winston Peters said New Zealand was concerned by the latest developments and supports both parties to seek peaceful solutions to the dispute through diplomacy and dialogue.
He reiterated that New Zealand condemns all forms of terrorism and urges all members of the international community to work together to eradicate terrorism.
Indians celebrate Pakistani strike
While the results of the strikes in the early hours of Tuesday were disputed, that didn't stop many in India from believing their government's version of events.
"Modi ji [Indian PM Narendra Modi] has finally done it," said Sandeep Sharma, a driver in the Jammu region of India's border state of Jammu and Kashmir.
India's opposition leaders, many of whom have banded together against the ruling Bharatiya Janata Party (BJP), congratulated the Indian Air Force (IAF), though they stopped short of praising the prime minister.
"I salute the pilots of the IAF," Rahul Gandhi, leader of India's main opposition Congress, said in a tweet.
In a village 100m from the Line of Control that acts as the de facto border with Pakistan, men gathered around a bunker for security forces that is under construction and shouted slogans hailing India.
Timeline of India-Pakistan tensions
October 1947: First war between India and Pakistan over Kashmir just two months after they become independent nations.
August 1965: The neighbours fight another brief war over Kashmir.
December 1971: India supports East Pakistan's bid to become independent. The Indian air force conducts bombing raids inside Pakistan. The war ends with the creation of Bangladesh.
May 1999: Pakistani soldiers and militants occupy Indian military posts in Kargil mountains. India launches air and ground strikes and the intruders are pushed back.
October 2001: A devastating attack on the state assembly in Indian-administered Kashmir kills 38. Two months later, an attack on the Indian parliament in Delhi leaves 14 dead.
November 2008: Co-ordinated attacks on Mumbai's main railway station, luxury hotels and a Jewish cultural centre kill 166 people. India blames Pakistan-based group Lashkar-e-Taiba.
January 2016: Four-day attack on Indian air base in Pathankot leaves seven Indian soldiers and six militants dead.
18 September 2016: Attack on army base in Uri in Indian-administered Kashmir kills 19 soldiers.
30 September 2016: India says it carried "surgical strikes" on militants in Pakistani Kashmir. Islamabad denies strikes took place.
- ABC, Reuters, BBC