The two countries were subjected to a series of sanctions last spring after they carried out nuclear tests.
As evidence of progress, the official cited a moratorium announced by both countries on further nuclear testing and their promise to adhere to the Comprehensive Test Ban Treaty by September 1999.
He also noted that the two countries have committed themselves to strengthen controls on sensitive materials. In addition, they are discussing controls on the production of nuclear materials, the official said, speaking on condition of anonymity.
One of the biggest benefits for economically-weakened Pakistan will be that the U.S. will no longer oppose certain funding for the country proposed by the International Monetary Fund.
According to the official, the Clinton administration has taken some of the new waiver authority granted by Congress and is using it "judiciously" as a tool in ongoing talks over proliferation issues to help both countries.
Meanwhile, India and Pakistan agreed Friday to continue talking but are still blocked in a dispute over military positions on a Himalayan glacier that is the world's highest battleground.
Some 13 soldiers have been reported killed in the last 10 days in fighting at the Siachen Glacier in the disputed frontier province of Jammu-Kashmir.
Senior defense officials from both countries said after meeting in New Delhi that they hoped to continue discussions over the glacier at the next scheduled round of peace talks in February.
The two sides were trying to defuse tensions in the contested Kashmir region. Expectations for the meetings had been low, although officials hoped they could at least agree to a truce.
"It is a very complicated matter and a complex situation," said Pakistani Defense Secretary Iftikhar Ali Khan.
Pakistani officials rejected an Indian proposal for a cease-fire and demanded that India re-deploy its troops near the glacier. Indian Defense Secretary Ajit Kumar said his government would only discuss shifting troop positions after a cease-fire was in force.
In the latest flare-up in fighting along the 20,000-foot-high battlefield, five Indian civilians were reported wounded by Pakistani shelling near the town of Kargil. India claimed to have destroyed a Pakistani bunker and a building.
India's director-general for military affairs, Inder Verma, said Pakistani soldiers were trying to advance into the Saltoro mountains near the glacier.
"This is a national frontier. It's sacrosanct. There is a threat to it, so we have to take appropriate action," Verma said.
Pakistan denied the charge.
"Fighting takes place every day but there has been no attempt to capturIndian posts," said Tariq Altaf, a senior Pakistani official at the discussions.
India, which is mostly Hindu, controls two-thirds of Kashmir, while officially Islamic Pakistan holds the remaining third. The Indian part of Kashmir is India's only Muslim-majority province.
The dispute over the region has bedeviled relations between the two neighbors since they both became independent from Britain 50 years ago. Tensions have erupted twice into open warfare, and the conflict has assumed greater international importance since India and Pakistan conducted atomic tests in May and declared themselves nuclear powers.
The discussions that began Thursday in India's capital between the two nations' defense secretaries were part of a fresh round of wide-ranging talks.