Pakistan and India said they had shot down each others' fighter jets in a dogfight over Kashmir as their escalating confrontation flared into combat.
As Islamabad said it had also traded air strikes with its rival, world leaders called on the nuclear-armed neighbours to show restraint.
The aerial combat came a day after India claimed it had destroyed a large militant camp inside Pakistan were militants were plotting an imminent attack.
Pakistan on Wednesday said it had launched its own strikes over the contested line of control that divides Kashmir and had also shot down two Indian jets and taken a pilot prisoner.
Amid growing alarm around the world at the quickly rising tensions, Imran Khan, Pakistan's prime minister, called for talks with his counter part Narendra Modi.
“Better sense should prevail,” Mr Khan said, warning that the two nuclear adversaries could ill afford a “miscalculation”.
Pakistan said one of the jets it had shot down landed in its territory, and the other landed in Indian-controlled Kashmir. Video footage of a captured Indian airman being interrogated was released by his Pakistan captors, causing anger in India that he was being paraded in front of the cameras for propaganda. One film showed the bloodied and blindfolded pilot giving his name, rank and number, while a later film showed him cleaned up, drinking tea, saying he had been well treated and describing his captors as gentlemen.
India acknowledged it had lost only one of its MiG 21 jets over Kashmir and one of its pilots was missing in action, but in a chaotic day of contradictory claims, said it had also shot down a Pakistani plane. That was denied by Islamabad.
Pakistan's strikes against targets over the line of control were to demonstrate it had the right to defend itself, rather than in retaliation against Indian aggression, a military spokesman said.
The Pakistani jets had locked on to six targets, in a demonstration of their capacity to hit strategic installations, but deliberately fired into open spaces where there would be no casualties, said Maj Gen Asif Ghafoor.
"This was not a retaliation in true sense, but to tell Pakistan has capability, we can do it, but we want to be responsible, we don't want an escalation, we don't want a war,” he told a press conference.
Raveesh Kumar, a spokesman for India's foreign ministry, gave a different account, telling a news briefing that the Pakistan air strikes on military targets had been "foiled".
India shot down one Pakistani plane that landed in Pakistani territory and lost one of its own planes, he said.
To add to the confusion, an Indian Mi17 military helicopter crashed in Kashmir killing five in an unrelated incident due to a technical fault.
Pakistan's latest confrontation with India after a suicide bombing killed at least 40 paramilitary police in Indian-controlled Kashmir is the most serious stand-off between the pair in nearly two decades.
India blames the Pakistan-based Jaish-e-Mohammad group for the February 14 attack and says it was overseen by Pakistani intelligence officers. Pakistan denies involvement and has told Delhi it will act if it is shown actionable intelligence.
Pakistani Prime Minister Imran Khan called for talks with India and hoped "better sense" would prevail so that both sides could de-escalate.
"History tells us that wars are full of miscalculation. My question is that, given the weapons we have, can we afford miscalculation," Mr Khan said during a brief televised broadcast to the nation. "We should sit down and talk."
Concern that the tit-for-tat retaliation would spiral out of control led to a stream of world leaders calling on the neighbours to show restraint.
Mike Pompeo, United States Secretary of State, said he had called both sides and told them to talk.
"I expressed to both ministers that we encourage India and Pakistan to exercise restraint, and avoid escalation at any cost. I also encouraged both ministers to prioritise direct communication and avoid further military activity," he said.
EU foreign policy chief Federica Mogherini warned the tensions had "the potential to lead to serious and dangerous consequences for the two countries and the wider region".
India launched the first strikes on Tuesday, claiming it had killed a large number of militants at a hilltop base near Balakot. Pakistan's military denied any camp had been struck and said the intruders had dropped their payloads in deserted forest after being intercepted and chased off. Local villagers at the scene said they had been woken by four blasts, but the damage had largely been to trees with one man lightly wounded.
Commercial flights were cancelled as both sides closed airports in the wake of the Wednesday's aerial clash. Pakistan shut its airspace temporarily.
Troops clashed along the line of control as well. Pakistan used heavy calibre weapons in 12 to 15 places along the heavily militarised frontier, a spokesman for the Indian defence forces said.
"The Indian Army retaliated for effect and our focused fire resulted in severe destruction to five posts and number of casualties," the spokesman said.
Five Indian soldiers suffered minor wounds in the shelling that ended on Wednesday morning, he added. Officials on the Pakistani side said at least four people had been killed and seven wounded, including civilians.
Mr Modi has come under vocal domestic pressure to act against Pakistan ahead of a spring general election.
A firm line on military action could benefit him politically, according to analysts and pollsters, but he was accused on Wednesday by opposition parties of capitalising on conflict.
Congress leader Rahul Gandhi criticised the "blatant politicisation of the sacrifices made by our armed forces", in the first time opposition parties have broke ranks with the government since the attack.