US, NKorea in talks again amid breakthrough hopes

SEOUL, Jan 17 (Reuters) US and North Korean envoys were set for a second day of unprecedented talks in Berlin today, raising prospects for a breakthrough in their stand-off over Pyongyang's nuclear arms programme.

Officials said Washington's willingness to talk directly with Pyongyang -- as North Korea has long demanded -- suggested it may now be ready to compromise over a crackdown on the communist state's finances, despite its defiant nuclear test last October.

Several officials in Washington said they believed the Bush administration was inclined to find a solution to the dispute over North Korea's accounts at a Macau bank, which it has called ''a willing pawn'' in Pyongyang's illicit financial deals.

Yesterday's bilateral talks between US envoy Christopher Hill and North Korea's Kim Kye-gwan in Berlin were the first outside the framework of six-country nuclear negotiations in Beijing since their beginning in 2003.

South Korean Foreign Minister Song Min-soon said the meeting should bring the two sides a step closer to implementing a key agreement on ending North Korea's nuclear arms programme which was struck in September 2005.

''The work now being done is to bring tangible results when the six-way talks take place next time,'' Song said.

''There will have to be a good platform laid at this meeting for reaching an agreement on early steps on implementing the September 19 joint statement.'' In that statement, hammered out in talks with South Korea, the United States, Japan, Russia and China, Pyongyang agreed to trade its nuclear arms for economic aid and security guarantees.

The talks later bogged down over Pyongyang's complaint that a US squeeze on its financial activities was proof that Washington remained hostile to its leaders.

The United States has since agreed to meet North Korean officials separately on the financial crackdown and is looking at the possibility of releasing some of the North's funds it froze, US officials said.

The separate meeting of US and North Korean financial officials are set to resume next week in New York.

''They are taking another look at this issue,'' said one US official. ''There is active discussion within the administration on whether to make concessions and if so, how far, how fast and under what conditions.'' MACAU ACCOUNT US authorities are scrutinising a number of North Korean accounts at the Macau bank to see if funds from the North's legitimate business can be separated from illicit cash flow, one of the officials said on the condition of anonymity.

Firms, among them British American Tobacco, have said some of the funds frozen at the Macau bank are from legitimate business.

North Korea has said unfreezing the Macau funds is prerequisite to serious talks on implementing the 2005 deal, and its chief nuclear envoy Kim refused to take any of the US ideas presented by Hill at six-party talks in Beijing last month.

''I expect that the North has come with its own response to a proposal put to them in December,'' Song said.

Song said there were no signs that North Korea was preparing a second nuclear test. The North conducted its first test on October 9 last year, triggering UN Security Council sanctions.

''We have no specific evidence that North Korea will conduct such a test,'' Song said.

A European diplomat said recent intelligence reports indicated that Pyongyang appeared to be planning a second test, which could be timed to fall on the birthday of its leader, Kim Jong-il, next month or that of his late father in April.

North Korea, despite the Berlin discussions, was defiant in state media commentary.

''With no artifice can the US conceal its true colours as the very one wrecking peace of the peninsula and seeking the provocation of a war against the DPRK and the disturber of Korea's unification,'' its official Rodong Sinmun said.

REUTERS MS ND1528