* Pakistan, Sri Lanka to release Indian prisoners in goodwill
* Arun Jaitley top name for finance minister
* Modi streamlines cabinet (Recasts with comments by Sharif)
By John Chalmers and Frank Jack Daniel
NEW DELHI, May 26 (Reuters) - South Asia's bitterest rivals have an opportunity to turn a page in their history of troubled relations, Pakistan's prime minister said on Monday after he and other regional leaders arrived for the swearing-in ceremony of India's Narendra Modi.
Modi's invitation to leaders from across the region means his inauguration as prime minister in New Delhi is as much a show of his determination to be a key player on the global stage as a celebration of his stunning election victory.
Pakistan's Nawaz Sharif said the nuclear-armed neighbours, which were traumatically separated at the end of British rule in 1947 and have fought three wars since, should together rid their region of the instability that has plagued them for decades.
"We should remove fears, mistrust and misgivings about each other," he told the NDTV news network in the Indian capital, a few hours before Modi's elaborate swearing-in ceremony at the presidential palace, a colonial-era sandstone mansion.
Some 4,000 guests are expected at the palace, making it the biggest event of its kind since independence. Security was heavy for the ceremony, which is due to begin at 6 p.m. (1230 GMT).
Modi's Hindu nationalist Bharatiya Janata Party (BJP) and its allies swept India's elections this month, ousting the Nehru-Gandhi dynasty in a seismic political shift that has given his party a mandate for sweeping economic reform.
His day began with a visit to the site of independence hero Mahatma Gandhi's cremation on the banks of the Yamuna river.
Even before his inauguration, Modi made waves on the global stage, where once he was treated by many with suspicion - and by some as a pariah - for Hindu-Muslim violence that erupted 12 years ago in Gujarat, the western state he ruled.
Modi, 63, has spoken with the presidents of the United States and Russia, and he has become one of only three people that Japanese Prime Minister Shinzo Abe follows on Twitter. The U.S. administration denied Modi a visa in 2005, but President Barack Obama has now invited him to the White House.
The low-caste son of a tea stall-owner, Modi has given India its first parliamentary majority after 25 years of coalition governments, which means he has ample room to advance reforms that started 23 years ago but have stalled in recent years.
Many supporters see him as India's answer to the neo-liberal former U.S. President Ronald Reagan or British leader Margaret Thatcher. One foreign editor has ventured Modi could be so transformative he turns out to be "India's Deng Xiaoping", the leader who set China on its path of spectacular economic growth.
Modi kicked things off on Sunday with an announcement that he would streamline the cabinet, a move to a more centralised system of governing aimed at breaking decision-making bottlenecks widely blamed for dragging down economic growth.
Modi said he would appoint super ministers in charge of several departments to make ministries coordinate better.
Arun Jaitley, 61, is the front runner to be named finance minister, party sources said. One of the top corporate lawyers in the country and a close Modi aide, Jaitley served in a previous BJP administration as commerce minister.
The BJP has long advocated a tough stance on Pakistan, with which India has a major territorial dispute in Kashmir, and Modi has been seen as a hardliner on issues of national security.
In that respect, Modi's decision to invite Sharif for his inauguration and bilateral talks came as a surprise and raised hopes for a thaw in relations between the rivals, which have been particularly frosty since 2008 attacks on the city of Mumbai by Pakistan-based militants.
Vikram Sood, former head of India's external intelligence agency, the Research and Analysis Wing, told Reuters that inviting all the leaders of the South Asian Association for Regional Cooperation (SAARC) was "an astute" diplomatic gesture.
"This augurs well for the region, and an improvement of relations all over the region is possible if these moves are followed by other steps, bilaterally and multilaterally," he said.
As a gesture of goodwill following their invitations, Pakistan and Sri Lanka released hundreds of Indian fishermen jailed for straying into their neighbours' territorial waters.
India is the biggest South Asian nation, but friendships with neighbours have soured in recent years, allowing China to fill the gap.
China has built a port in Sri Lanka and is involved in upgrading another in Bangladesh, besides military and civil assistance to long-time ally Pakistan, heightening Delhi's anxieties of being boxed in.
"Modi has appreciated the much-neglected fact that foreign policy begins at the nation's borders," wrote foreign policy analyst C. Raja Mohan in the Indian Express. "As a realist, however, Modi should be aware that major breakthroughs are unlikely amid the current flux within Pakistan." (Editing by Nick Macfie)