OK, here goes again:
This is based on my own observations, and some experience in India.
The basic conflict is over power. Specifically keeping it, and remaining in it. There is a strong element of machismo present in the social fabric and politics of the region. Backing down is a sign of weakness, and any hint of weakness can spawn the collapse of a government with the concommitant removal of the guy in power. To remain in power, the bosses, and their flunkies, must demonstrate strength and resolve in the face of foreign threats.
The Kashmir region itself has nothing worth owning. It is relatively worthless economically, and has little strategic importance to either nation. The only significance of the region is that both India and Pak claim it, and can't resolve the issue. The fact is, if either India or Pak said "to heck with it" and just walked away, the whole area would disappear from the news and continue to quietly sink into abject poverty. No one would care about it anymore.
One significant roadblock to resolving the situation is the nationalistic drumbeating and patriotic fervor that has been grown in both countries in an effort to protect the power of a particular group. There are three basic groups in either country: The have-a-lots, the have-a-littles, and the don't-even-know-what-they-are-missing. The last group is the largest, and are primarily occupied with the day-to-day problem of not starving to death. They have no interest in the Kashmir, and little interest in anything that does not directly affect their daily struggle to just survive. They are mostly dirt-poor, and largely uneducated. They have no concept of nuclear war, and most cannot even grasp the idea of "10-20 million dead".
(I should be very clear here...I am not talking about living-in-your-car poor. I am talking about are-you-sure-we-can't-eat-sand? poor. These folks are poor beyond our priviledged Western understanding.)
The top end group are the relatively wealthy class. These are the movers and shakers in each nation's politics, and usually either support the current regime or support the political opposition. They are remoted from the rest of their own society by their economic station, and tend to consider the lower classes as tools or pawns. They don't exactly look down on them, but they aren't too concerned with anything that doesn't affect their power base. This is a relatively small part of the society, but wields most of the influence. They would consider losses among the poorest classes to be saddening but acceptable, to be leveraged for political purposes. Since the bulk of the major cities are composed of the poorer classes, and the powerful generally live away from the city, nuclear strikes are a bearable hardship for them.
The middle group is the local version of "middle class". They are actually quite poor by Western standards, but are pretty well-off by local standards. They are generally educated, and somewhat understand nuclear war and the staggering losses associated with it. However, they are primarily concerned with improving their own situation and are only concerned with national politics as far as it affects them directly. They are the primary electors, such as their systems allow, and their support can make (or break) the current government. They are often manipulated by the power class, using the standard means of economic payoffs and patriotism/nationalism.
This nationalism is the key to why it is so hard to back down. Both sides have whipped up sentiment in support of their own position, usually in an effort to divert attention from domestic issues, and to enable the claim of being the stronger leader. At this point in the crisis, there are not a lot of ways to back down without appearing weak. As of today, the Indian government has offered a solution (the UN...HA!) without actually giving up anything. There isn't much room for any other approaches, and if this doesn't work there isn't much recourse short of war. Provocation by al-Quaeda groups in the region (guess where they came from?) could easily erode any wiggle room the Indians have, since one of their conditions is stopping the cross-border terrorist attacks.
The outcome of a nuclear war is messy at best. Aside from the actual nukes and their byproducts, the region is likely to fall apart completely. India is composed of a number of distinct societies and cultures, and at least two major religions that are already at odds. There is a good chance that India would break up into 7-10 different 'republics', most with an axe to grind with one or more of their neighbors. With the army and the police otherwise engaged, the local warlords are likely to take the opportunity to 'improve their positions'.
Also, China has long had its' eye on the Northern areas of India, which are ethnically closer to China than to India. The chaos of a nuke war offers an ideal opportunity to create a Chinese 'protectorate'...just until the central government gets back on their feet and offers the residents adequate protections, natch.
The UN is unlikely to offer much to end the conflict. Their track record for conflict resolution is poor unless the US is standing over their shoulder. The US penchant for passing responsibility to the UN, then standing back while the UN bureaucracy avoids making decisions (can't be fired for making the wrong decision if you continue to study the question). At best, the UN can only defer the confrontation until later. Putting US troops (or anyone elses!) into the region risks creating a grounding rod for the tension, as both sides turn to deal with the interlopers. If a nuclear exchange does occur anyway, then troops in the area will simply increase the casualty count.
This is just my opinion, but I don't see many alternatives to some sort of war either now or sometime in the near future. I pray that it doesn't happen, but expect that it will. Perhaps the boil will reduce to a simmer, but it will not cool down much. Don't be shocked if we see mushrooms over Indo-Pak.
I don't know if this helps, or if this even adds to the discussion, but I wanted to add my bit to the soup.
