'Energise trade'

According to Monday's KCNA report, North Korea agreed to restart tours for South Korean visitors to the scenic Diamond Mountain resort and ancient sights near the city of Kaesong, just across the heavily-fortified border.

The tours had been suspended following South Korea's tougher stance on the North's nuclear disarmament efforts after Lee Myung-bak took office as president early last year.

South Korea's Hyundai has made huge investments in North Korea [AFP]
North Korea also said it agreed to ease restriction on border traffic and "energise" the operation of a joint factory park in Kaesong, the last remaining joint project between the Koreas.

The future of the industrial complex was thrown into doubt after the North significantly restricted border crossings and demanded a massive increase in rent and salaries for North Korean workers at the complex.

North Korea said the agreement was reached after a meeting on Sunday between Hyun Jung-eun, the chairwoman of Hyundai Group, and Kim Jong-il, the North's reclusive leader.

Hyun travelled to Pyongyang early last week to seek the release of a detained Hyundai employee before extending her stay in an apparent attempt to meet Kim, an official and her company said.

The KCNA said Hyun presented an unidentified gift to Kim at the meeting ahead of a luncheon Kim hosted for the industrialist and her delegation at the weekend.

Kim had "a cordial talk with Hyun in an atmosphere of compatriotic feelings" and "complied with all her requests", the news agency said.

Both tours to Diamond Mountain and Kaesong had been run by Hyundai Asan, a subsidiary of the Hyundai group, the biggest South Korean investor in the North.

Reunions

The KCNA news agency said the North also agreed to resume reunions of families separated since the end of the Korean War.

It said the first reunion could take place at the Diamond Mountain resort during the Chuseok" autumn harvest holiday on October 3.

Families were separated after the end of the 1950-1953 Korea War [GALLO/GETTY]
The issue of divided families is one of the bitterest and most emotionally-charged legacies of the Korean War, with thousands of families having had little or no contact over the past five decades.

Responding to the North Korean announcement a South Korean unification ministry official said the government would decide on whether to accept the North's proposals after getting the details of the agreement from the Hyundai chairwoman when she returns.

North Korea meanwhile in a separate statement on Monday said its military would be placed on high alter over the start of South Korea-US annual computer-simulated war games.

The Supreme Command of the [North] Korean People's Army said the drills were "a blatant challenge and grave threat" to peace on the Korean peninsula.

In the statement the North warned of a "merciless and prompt annihilating strike", including nuclear weapons, which it said would follow the "slightest military provocation" against its sovereignty.

North Korea sees the joint exercises as preparation for an invasion, but the US and South Korea say the manoeuvres are purely defensive.

North and South Korea remain officially at war, having never signed a formal peace treaty cementing the truce that brought a halt to the 1950-53 Korean War.