Speaking at a press conference, Foreign Office spokesman Aizaz Chaudhry also said that Siachen glacier should be demilitarised and there should be disengagement of forces.
"We believe that Kashmir issue should be resolved peacefully through talks for which we have always urged the Indian government to engage with us in meaningful and substantive talks. We also believe that Kashmiri leadership should be associated with that resolution," Chaudhry said.
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His remarks came a day after reported comments of Prime Minister Nawaz Sharif on Kashmir issue created a furore.
A leading Pakistani daily reported that Sharif had contended the Kashmir issue is a flashpoint which "can trigger a fourth war" with India.
His office later denied that he had made any such statement.
However, the daily today said it was part of the statement issued by the Information Department in Muzaffarabad in Pakistan-occupied Kashmir.
Asked about Prime Minister's statement that he would like to see "held-Kashmir free from the Indian occupation", Chaudhry said, "Our position has been very clear right from the beginning. Pakistan has always extended moral and diplomatic support to the Kashmiri people and this is nothing new.
"At the same time Prime Minister has also voiced his desire to have peaceful and good neighbourly relations between India and Pakistan. I think resolution of Kashmir issue would actually help that broader objective."
Speaking about the proposed wall along the LoC, he said there was an understanding that there should be no construction within 500 meters of the LoC which should be respected.
"Pakistan and India need to address all outstanding issues and try to address the mistrust that exists that divides the two countries.
"For its part Pakistan is committed to a meaningful dialogue and we believe that dialogue is the best way to resolve all outstanding issues and misunderstanding," he said.