What region is most affected by the Kashmir conflict?

The short answer - the state of Kashmir itself

The long answer - The Indian raj split up in 1948 into three separate states - Indian, Pakistan and Sri Lanka. The north was split into two, India and Pakistan with the Hindu and Sikh areas going to India and the Muslim areas going to Pakistan.

The exception to this was Kashmir, a Muslim dominated area that was claimed by India. Since the split the Muslim population has fought against the Indian army to gain there Independence and (depending on who you listen too) Pakistan has been aiding the rebels. The war, apart from fighting in Kashmir itself, has seen terrorist attacks take place in other areas in India and has contributed to the hostile relationship between India and Pakistan.

So - while Kashmir itself has seen the most fighting the wider subcontinent has been greatly affected as well.