"The issue of Jammu and Kashmir comes up in our relationship with Pakistan and we've said very clearly, very confidently and very transparently that we are prepared to discuss all outstanding issues with Pakistan," the foreign secretary said on Monday.
Rao added that India wants to "persevere in our dialogue with Pakistan. It is not about segmenting this dialogue or taking away the complicated issues from it saying we are not ready to discuss it.
"That is certainly not our approach.
"We want to discuss all the outstanding issues and that will also include the issue of Jammu and Kashmir."
The top diplomat, who was in Washington earlier to discuss President Obama's upcoming India visit in November, stressed that Kashmir is an internal matter as far as India is concerned.
"It is an internal affair because it (Kashmir) is an integral part of India."
She said India is "determined to persevere in our dialogue with Pakistan to resolve outstanding issues so that our region will be stable and so that the rationale of economic development in an atmosphere of peace, for all of South Asia, remains our steadfast goal."
Later, referring to the 26/11 Mumbai attacks, Rao told PTI it's an issue that is very much a part of what "we want to speak to Pakistan about. On Mumbai, closure is needed."
She said Pakistan's Interior Minister Rehman Malik is in touch with the Indian home ministry about the 26/11 trial.
"The trial has moved slowly. There has not been much progress to show out of it."
In Boston to deliver the Harish Mahindra Memorial lecture at Harvard University on 'India's Global Role,' Rao said India wants to create an economic environment with its neighbours since a peaceful neighbourhood is mandatory for the "realisation of our own vision of economic growth."
However, India's vision of enhanced South Asian cooperation for development is challenged by violent extremism and terrorism which originates in "our region and finds sustenance and sanctuary there," Rao added.
"Our relationship with Pakistan has been complicated by the issue of terrorism and the need for Pakistan to take ameliorative action to eradicate terrorism against India.
"Despite this threat, we understand well the Kautilyan advice that a great power loses stature if it remains bogged down in neighbourhood entanglements," the foreign secretary said.
Terrorists have repeatedly sought to undermine India's security and economic progress "aided and abetted by forces beyond our border," she said, adding that terror groups implacably opposed to India continue to recruit, train and plot attacks from "safe havens across our borders."
Pointing out that the threat from terrorism cannot be dealt with through national efforts alone, Rao said it is time the international community "works towards early adoption of a Comprehensive Convention on International Terrorism that was tabled at the UN over a decade ago."
On Afghanistan, Rao said India is "supportive" of the US's efforts to fight terrorism and bring stability in the war-ravaged country.
"We have a direct interest in Afghanistan, not because we see it as a theatre of rivalry with Pakistan but because of the growing fusion of terrorist groups that operate from Afghanistan and Pakistan and their activities in India," she added.
India's $ 1.3 billion assistance to Afghanistan has helped build vital civil infrastructure and develop human resources and capacity in areas of education, health, agriculture and rural development.
Rao said India will stand by this commitment despite the grave threat under which its personnel and people work in Afghanistan.
