Suspected suicide blast kills 3 in Pakistan

"There was an apparent suicide attack and at least three people have been killed," said police official Ali Khan.

Further details about the attack, near the town of Kamra, northwest of Islamabad, were not immediately available.

Taliban militants have stepped up attacks on urban targets as the Pakistani military continues a major offensive against the insurgents in their strongholds in South Waziristan near the Afghan border.

Analysts have warned of the possibility of more urban attacks as the militants are squeezed out of their strongholds, with the Taliban hoping bloodshed and disruption will cause the government and ordinary people to lose their appetite for the offensive.

The offensive is a test of the government's determination to tackle Islamic fundamentalists, and the campaign is being closely followed by the U.S. and other powers embroiled in Afghanistan.

The benchmark KSE index fell 3 percent on Thursday's false rumours of an incident at a courthouse but recovered to close down 1 percent, after falling 3.4 percent on Wednesday.

"Investors are very jittery at this point due to the law and order situation," said Sajid Bhanji, a dealer at brokers' Arif Habib Ltd.

Remote and rugged South Waziristan, with its rocky mountains and patchy forests cut through by dry creeks and ravines, is a global hub for militants.

About 28,000 soldiers are battling an estimated 10,000 hard-core Taliban, including about 1,000 tough Uzbek fighters and some Arab al Qaeda members.

The army said 24 militants and two soldiers were killed in the fighting on Thursday.

Foreign reporters are not allowed anywhere near the battle zone and it is dangerous even for Pakistani reporters to visit. Independent confirmation of casualty figures has not been possible.

More than 100,000 civilians have fled the area, with about 32,000 leaving since October 13, the United Nations said.

The army has launched brief offensives in South Waziristan before, the first in 2004 when it suffered heavy casualties before striking a peace pact.

(For a graphic showing the whereabouts of fighting, see http://graphics.thomsonreuters.com/RNGS/OCT/PAK5.jpg)

(Reporting by Zeeshan Haider; Writing by David Fox; Editing by Alex Richardson)