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Prime Minister Manmohan Singh said he was "shocked and distressed" by the demonstrations engulfing Kashmir, where 18 people died on Monday in the bloodiest day in three months of protests.
On Wednesday, police opened fire on a rally in the previously quiet town of Mendhar, about 210 kilometres (130 miles) from the town of Jammu.
"As the situation went out of control, police opened fire to disperse the mob in which three protesters were killed and at least 25 others were injured," said a police spokesman in Jammu, asking not to be named.
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For three months, young Kashmiris have thrown stones at security forces, defied strict curfews and held anti- India rallies, resulting in clashes that have now left 91 people dead.
But since the weekend, the violence has risen in intensity, with mob attacks and arson taking place, apparently fuelled by reports about the desecration of the Koran by a small group of Christians in Washington on Saturday.
Police in Jammu said the crowd had tried to attack a Catholic school in Mendhar.
Speaking at the start of a meeting of all major political parties in New Delhi on Wednesday, Singh said dialogue was the only way out of the crisis but that peace and calm had to be restored first.
"The only path for lasting peace and prosperity in Jammu and Kashmir is that of dialogue and discussion," Singh said.
"Those who have grievances against the government have to talk to the administration," he said. "But it is also true that meaningful dialogue can happen only in an atmosphere free from violence and confrontation."
Singh, who admitted last week that he was "groping" for a response, chaired the all-party meeting at his residence, with the government under pressure to show leadership.
One measure under consideration is the partial withdrawal of a tough military law in the region, which grants the armed forces immunity and is seen as fuelling a sense of injustice for Kashmiris.
The cabinet discussed this at a meeting on Monday, but decided against taking a decision.
Politically, the ruling Congress party is hemmed in by the right-wing Bharatiya Janata Party (BJP) main opposition group, which sees any concession on autonomy or security as a betrayal of the nation.
The prime minister warned last week that there "is no royal road to success" and that he "can't pull a rabbit out of a hat" in Kashmir, which is part of the northwestern state of Jammu and Kashmir.
Singh has doggedly pursued peace talks with Pakistan, argued in favour of reducing the military presence in Kashmir and repeatedly offers talks to all parties in Kashmir that reject violence.
"Each of these enterprises ended in impasse," said The Hindu. "By talking big while having little to offer, New Delhi has unwittingly fanned the flames," it said.
"Firm, generous-spirited action to win over the people is needed."
Elsewhere in Kashmir, police imposed a strict curfew in all major cities and other trouble spots, leading to complaints from residents that they were running low on food.
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