India is recalling its ambassador from Pakistan and suspending rail and bus services that link the two countries.
It is the latest signal of worsening relations between the two countries, in the wake of last week's suicide attack on the Indian parliament.
An Indian foreign Ministry spokeswoman, Nirupama Rao, says the actions are a result of Pakistan's failure to take any steps against two Islamic militant groups, which New Delhi has blamed for last week's suicide attack on India's parliament.
"In view of this complete lack of concern on the part of Pakistan and its continued promotion of cross border terrorism, the government of India has decided to recall its High Commissioner in Islamabad," she said.
Mrs. Rao says beginning January 1, the government will also terminate train and bus service that runs between the two countries. The train service started in 1975. The bus route was opened in 1999 - and was seen as a path-breaking peace gesture between the two countries.
Following the attack on parliament, India asked Pakistan to arrest the leaders and freeze the financial assets of the Lakshar-e-Taiba and the Jaish-e-Mohammad. India blamed the attack on those two groups, which it says are sponsored by Pakistan.
Pakistan strongly denies any involvement and has asked for evidence of the groups' role in the attack. India says it is sharing evidence with the United States, Britain, and other friendly countries.
India has also asked Pakistan to take the bodies of the five gunmen who were killed in the assault. New Delhi says they were all Pakistani citizens.
The Indian accusations have led to a tense standoff between the two countries. India has said it is keeping all options open, including military retaliation, if Pakistan does not act against the militant groups.
There are reports that India is mobilizing its forces in the Indian states of Rajasthan and Punjab, which share a border with Pakistan. Media reports have spoken of tanks, army jeeps and medical vans moving towards the border. The Indian Defense ministry has played down these reports, saying there maybe some troop movement, but not to the extent described.
In a related development, India's Foreign Minister Jaswant Singh has welcomed the U.S. decision to freeze the assets of the Lakshar-e-Taiba - one of the two groups blamed for the attack on Parliament.
In recent years, it has emerged as one of the most daring Kashmiri militant groups, blamed for several high-profile suicide attacks, including one on New Delhi's historic Red Fort last year.