Pakistan Prime Minster Imran Khan told a joint session of Parliament that IAF's captured pilot Wing Commander Abhinandan Varthaman will be released on Friday as a gesture of peace.
"In our desire for peace, I announce that tomorrow, and as a first step to open negotiations, Pakistan will be releasing the Indian Air Force officer in our custody," PM Khan said.
The gesture is greeted with near unanimous support in the parliament.
Addressing a joint session of the National Assembly, Khan said the India-Pakistan situation should not "get out of hand" otherwise "Pakistan will have to retaliate," the Dawn reported.
"Countries are ruined because of miscalculation," said Khan. Alleging "war hysteria" in India, he said: "I'm afraid there might be a miscalculation.
"War is not a solution. If India takes any action, we will have to retaliate."
The joint session of Parliament was called to discuss the rising tensions with India.
"The only purpose of our strike (on India on Wednesday) was to demonstrate our capability and will," said the Prime Minister. "We did not want to inflict any casualty on India as we wanted to act in a responsible manner."
He said he tried to call Indian Prime Minister Narendra Modi on the telephone on Wednesday because "escalation is not in our interests nor in India's".
The surprise announcement came barely an hour after Foreign Minister Shah Mehmood Qureshi said that Prime Minister Khan is ready to talk to Indian Prime Minister Narendra Modi to de-escalate Indo-Pak tensions.
The announcement was greeted by thumping of desks by Pakistani lawmakers.
Indian and Pakistani air force engaged in "aerial engagement" on Wednesday, a day after Indian fighter jets bombed a Jaish-e-Mohammad training camp in Balakot.
On Wednesday morning, Pakistani jets entered Indian airspace in the Jammu sector, and Indian Air Force fighter jets chased them. Abhinandan Varthaman's MiG21 Bison jet crossed into Pakistani airspace while chasing away a Pakistan Air Force jet and was shot down.
(With inputs from Agencies)