"It is their (Kashmiris) right to decide, whatever they want," he told a cheering audience of American intellectuals, former diplomats, representatives of media and members of Pakistani community at Asia Society.
"This is an open offer, why don't India and Pakistan both allow them to decide their future," he added.
The prime minister, who was answering a question, said India was now targeting Azad Kashmir after annexing occupied Kashmir.
Imran Khan was greeted with a sustained applause as he walked in to interact with the large gathering, ahead of his much-anticipated address to the United Nations (UN) General Assembly on Friday.
He spoke extensively about the plight of millions of Kashmiri people who are languishing under a repressive lockdown, now its 53rd day, with phone and internet services cutoff, thousands arrested, medical supplies running short and schools closed.
"Eight million people are in an open jail," PM Khan said. "My biggest worry is what happens once the curfew is lifted? We fear with 900,000 soldiers there, there will be a massacre."
The United Nations, he said, has not played its part as it has not sent its observers to make an assessment of the humanitarian situation in curfew-bound Kashmir.
He said he was meeting United Nations (UN) Secretary-General Antonio Guterres on Friday and would urge him to discharge his responsibility of maintaining international peace and intervene in Kashmir, warning that it was too risky to allow tensions to escalate between India and Pakistan, both of which have nuclear weapons.
The Prime minister said Kashmir was a sort of dispute that the United Nations was established to resolve and stabilize the region.
"This is the UN's job," he said, adding, "They have to intervene, send observers there."
PM Khan also dismissed claims by India's army chief, Gen. Bipin Rawat, that Pakistan has reactivated militant training camps and about 500 militants are waiting to infiltrate India.
"What possible benefit is Pakistan going to have now sending in terrorists when there are 900,000 security forces there? All that would happen is that there would be more oppression on the people of Kashmir."
The prime minister said he has apprised world leaders gathered at the U.N. about the dangerous situation prevailing in Kashmir. "I have tried my best," he said.
"Unfortunately India today is governed by a racist ideology, which believes in a Hindu supremacy," Khan said.
"You cannot reason with a racist ideology, cannot reason with arrogance."
About President Donald Trump's offer to mediate the Kashmir dispute, he said the United States (US), as the most powerful country, should put its weight behind the UN and push for a settlement.
He said he had explained in detail the Kashmir issue to President Trump -- and that's why he said it was a complicated and difficult issue.
Responding to a question, the prime minister said he is working to help defuse the tensions in the Gulf at the request of both United States (US) President Donald Trump and Saudi Crown Prince Mohammad bin Salman, who asked him to meet Iranian President Hassan Rouhani.
He said had met President Rohani and he hoped that peace would prevail in Gulf.
He also hoped that United States would resume talks with the Taliban aimed at ending the 19-year-old conflict in Afghanistan.