Prime Minister Imran Khan has angered India after declaring that part of the contested Kashmir region will provisionally become a full province of Pakistan.
Pakistan has administered the area now known as Gilgit-Baltistan since shortly after the country's birth in 1947, but New Delhi asserts the mountainous territory bordering China and Afghanistan is an integral part of Kashmir that it claims belongs to India.
"We have decided to grant provisional provincial status to Gilgit-Baltistan, which was a long-standing demand here," Mr Khan said in a speech in Gilgit city on Sunday.
The move comes after New Delhi last year imposed direct rule over Indian-administered Kashmir, upending a decades-long status quo and drawing strong condemnation from Islamabad.
Mr Khan, who was speaking ahead of local elections slated for November 15, did not provide a timeline for the move.
China has spent years building infrastructure projects in Gilgit-Baltistan, home to an estimated 1.3 million people, including a long stretch of the Karakoram Highway, a key component to the China-Pakistan Economic Corridor (CPEC).
Mr Khan said the modern and well-maintained road had brought important progress to Gilgit-Baltistan and the move to make the area a province would help "uplift backward areas and poor segments of society".
Any change in status would require a constitutional amendment. If finalised, it would make Gilgit-Baltistan Pakistan's fifth province.
New Delhi condemned Mr Khan's announcement, saying it would "bring material changes to a part of Indian territory".
"Such attempts by Pakistan, intended to camouflage its illegal occupation, cannot hide the grave human rights violations, exploitation and denial of freedom for over seven decades to the people residing in these Pakistan-occupied territories," Indian Foreign Ministry spokesman Anurag Srivastava said in a statement.
India and Pakistan each control parts of Kashmir and both countries accuse the other of illegal occupations.
Two of the three wars the neighbours have fought since independence have been over Kashmir – home to shrinking Himalayan glaciers seen as vital lifelines to the water stressed countries.
In a move that outraged Pakistan, Indian Prime Minister Narendra Modi's government last year revoked articles in the Indian constitution that guaranteed Kashmir's partial autonomy and other rights including its own flag and constitution.
The two parts of Kashmir are divided by a UN-monitored "Line of Control" that is the subject to frequent cross-border shellings.