* Xi says watching Kashmir situation closely
* Row over India's decision to change Kashmir's status
* Informal summit meant to stabilise ties
* Xi also touring Nepal, first in 22 years (Adds comments by Xi, paragraphs 4-5)
By Sanjeev Miglani
NEW DELHI, Oct 9 (Reuters) - India's Prime Minister Narendra Modi will welcome Chinese President Xi Jinping at an informal summit this week, the Indian foreign ministry said on Wednesday, their talks coming at a time of strained ties over the disputed region of Kashmir.
The meeting in the southern Indian city of Chennai on Oct. 11-12 is aimed at enhancing the rapport the leaders built when they met in the Chinese city of Wuhan last year to help stabilise ties after a standoff in another contested section of their long border, far removed from Kashmir.
But India’s decision in August to withdraw special status for Kashmir drew sharp condemnation from Pakistan and its old ally, China, which took the matter to the U.N. Security Council.
During a meeting with Pakistan Prime Minister Imran Khan in Beijing on Wednesday, Xi said that he was watching the situation in Kashmir closely, the official Xinhua News Agency reported.
Xi said that the right and wrong of the situation was clear and India and Pakistan should resolve the dispute via peaceful dialogue, according to Xinhua.
India says its revocation of the special status of Muslim-majority Kashmir, which was accompanied by a crackdown on dissent by the security forces, is an internal matter aimed at developing the Himalayan territory, which is also claimed by Pakistan, more quickly.
India will make clear that any change to its Jammu and Kashmir state is an internal affair if the Chinese side were to raise the matter in the forthcoming talks, a government source said.
China's close security ties with Pakistan have long been a matter of concern in New Delhi and in recent years India has drawn closer to the United States to help balance China's rising weight across the region.
"The forthcoming Chennai Informal Summit will provide an opportunity for the two leaders to continue their discussions on overarching issues of bilateral, regional and global importance and to exchange views on deepening India-China Closer Development Partnership," the Indian ministry said in a statement.
China, which has been criticised by the United States for its treatment of members of Muslim ethnic minorities, said it believed India and Pakistan must refrain from taking unilateral action in Kashmir and has expressed concern over human rights violations there. India has dismissed those concerns.
Srikanth Kondapalli, professor of Chinese studies at New Delhi's Jawaharlal Nehru University, said it was important for the nuclear-armed neighbours to stabilise relations as both dealt with domestic and regional issues.
"The second informal meeting as such is significant given these ominous signals at bilateral, regional and global levels," he said.
Xi will also make a state visit to Nepal at the end of his India visit, the first by a Chinese president in 22 years, the Nepali foreign ministry said.
China has deepened ties with India's neighbours, building ports and power stations in an arc stretching from Bangladesh to Sri Lanka and Pakistan as part of its grand Belt and Road energy and infrastructure plan.
Ahead of Xi's trip to India, China invited Pakistan's Prime Khan for talks and said it supports Pakistan in safeguarding its independent sovereignty and territorial integrity.
The Himalayan region of Kashmir is divided between India, Pakistan and China. India rules the populous Kashmir Valley and the Hindu-dominated region around Jammu city, while Pakistan controls a wedge of territory in the west, and China holds a thinly populated high-altitude area in the north.
During Xi's visit, Modi is expected to raise economic issues, including India's $53 billion trade deficit with China in 2018/19, and the smaller presence of Indian companies in China compared with that of other major economies.
(Additional reporting by Neha Dasgupta in NEW DELHI and Gopal Sharma in KATHMANDU )