Indian Foreign Secretary Vikram Misri told a media briefing that the cross-border linkages of the attack had been "brought out" at a special meeting of the security cabinet, after which it was decided to act against Pakistani authorities.
He said India would suspend with immediate effect a crucial river water treaty that allows for sharing the waters of the Indus river system between the two countries.
The defence advisers in the Pakistani high commission in New Delhi were declared persona non grata and asked to leave, Misri said, adding that the overall strength of the Indian high commission in Islamabad will be reduced to 30 from 55.
The main border crossing checkpost between the two countries will be closed with immediate effect and Pakistani citizens will not be allowed to travel to India under special visas, Misri said.
At least 17 people were also injured in the shooting that took place on Tuesday in the Baisaran valley in the Pahalgam area of the scenic Himalayan federal territory of Jammu and Kashmir.
The dead included 25 Indians and one Nepalese citizen, police said.
It was the worst attack on civilians in India since the 2008 Mumbai shootings and shattered the relative calm in Kashmir, where tourism has boomed as an anti-India insurgency has waned in recent years.
A little-known militant group, the "Kashmir Resistance," claimed responsibility for the attack in a social media message.
It expressed discontent that more than 85,000 "outsiders" had been settled in the region, spurring a "demographic change".
Indian security agencies say Kashmir Resistance, also known as The Resistance Front, is a front for Pakistan-based militant organisations such as Lashkar-e-Taiba and Hizbul Mujahideen.
Pakistan denies accusations that it supports militant violence in Kashmir and says it only provides moral, political and diplomatic support to the insurgency there.
Pakistani officials extended condolences to the victims' families.
"We are concerned at the loss of tourists' lives," Pakistan's Ministry of Foreign Affairs said in a statement while wishing the wounded a speedy recovery.
Indian forces on Wednesday launched a manhunt for the assailants.
Tens of thousands of police and soldiers fanned out across the region and erected additional checkpoints.
They searched cars, used helicopters to search forested mountains and in some areas summoned former militants to police stations for questioning, reports said.
Many shops and businesses in Kashmir closed to protest the killings.
Following the attack, panicked tourists started to leave Kashmir.
Monojit Debnath, from the Indian city of Kolkata, said Kashmir was beautiful but his family did not feel secure anymore.
"We are tourists, and we should think about what safety we have here for us," Debnath told the Press Trust of India news agency as he was leaving Srinagar, the region's main city, with his family.
"It's heartbreaking to see the exodus of our guests from the valley after yesterday's tragic terror attack," Omar Abdullah, the region's top elected official, wrote on social media.
"But at the same time, we totally understand why people would want to leave."
with AP
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