"We have communicated our concern. We will wait for a direct response (from Pakistan) before we decide on the next step to take," Khurshid told television channel CNN-IBN.
Describing the killings as "hurtful and distressing", Khurshid said "it was a difficult diplomatic situation" for the government which is "tremendously concerned" over the incident.
Indian officials said that Pakistani soldiers sneaked into Jammu and Kashmir Tuesday under the cover of thick fog and killed two Indian soldiers and wounded a third. Pakistani soldiers allegedly beheaded the two Indian soldiers and mutilated their bodies.
He said the mutilation of the Indian soldiers was "an extremely sensitive matter" and "a matter of great concern to everyone".
Saying the incident would "retard the forward movement of the ongoing India-Pakistan dialogue", Khurshid said "it would be difficult to move ahead on relations between the two countries" until Pakistan showed "results on deliverables".
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Pakistani High Commissioner Salman Bashir was called to the external affairs ministry "and spoken to in very strong terms", Khurshid said here.
"This is an additional and significant issue and has serious implications," said Khurshid.
The minister said the ceasefire on the Line of Control (LoC) in Jammu and Kashmir since 2003 was the most important part of the confidence building measures between the two countries.
"Therefore, violation of that itself is a manner of great concern and that will obviously, if not immediately contained, have an adverse impact on what we have been trying to do for such a long time," he said.
Pakistan has shown signs to take the dialogue forward, but there was a need to follow standard procedures at this point, he said.
"It is important that we remain in control of the situation and don't allow emotions to affect it. Let us exhaust all the procedures," he said.
Refusing to discuss the issue in public, he said the government's actions would speak louder than words.
"Just watch us," said Khurshid.