Lee has expressed regret that the two Koreas are spending an "enormous budget" on an arms race [REUTERS]
Lee Myung-Bak, president of South Korea, has urged North Korea to seize a "good chance" to improve relations, as the two sides prepare for talks aimed at easing months of high tensions.
Lee, in his first direct response to recent peace overtures from Pyongyang, also did not rule out a summit with the North's leader Kim Jong-Il.
"We can hold a summit if necessary... this is a good chance for North Korea," he said in a televised interview.
"I believe this is a good opportunity for the North, that it is engaging in dialogue with the South at this point," he said. "I have high expectations that (the North will realise) it is time for change."
Lee's conciliatory tone and the North's appeals for talks mark a significant shift from the war-like rhetoric bandied between the neighbours at the end of last year. The two sides agreed last month to hold high-level military dialogue.
Seoul has proposed preparatory talks on February 11, in what would be their first contact since Pyongyang's deadly shelling of a border island last November.
The working-level talks are aimed at setting the date, place and agenda for the high-level military dialogue.
But Seoul says the high-level meeting will only go ahead if Pyongyang takes responsibility for two attacks last year and promises no repetition.
Apart from the shelling of Yeonpyeong island, which killed four people including civilians, the South accuses the North of torpedoing a warship last March with the loss of 46 lives.
Pyongyang says the South provoked the island attack by test-firing shells into its waters, and says it had nothing to do with the sinking of Cheonan warship.
Lee also expressed regret that the two Koreas are spending an "enormous budget" on an arms race.
He said the North could probably overcome its persistent food shortages if it cut its defence budget by 20-30 percent.
The South was spending nearly 30 trillion won ($27 billion) a year on defence "and if we can cut it by 10 percent, or three trillion won, a lot could be spent on education".
Lee cut off a decade of unconditional aid to the North when he took office in 2008, angering Pyongyang, and demanded the isolated neighbour end its nuclear programmes if it wanted Seoul to get back to commercial exchange and giving aid.
Lee said a "strong response" to provocations could prevent any repetition. "I have great expectations that this may be time for North Korea to change," he said.
"If the North shows willingness for sincere dialogue instead of military provocations, we can hold inter-Korean dialogue, economic exchanges and talk about the six-party talks."
The six-nation negotiations on the North's nuclear disarmament - grouping the two Koreas, China, the United States, Russia and Japan - have been stalled for more than two years.
The US, South Korea and Japan say the North must improve cross-border ties before they can resume.
Regional powers have nudged the neighbours, still technically at war having signed a truce rather than a peace treaty to end the 1950-53 Korean War, back to the negotiating table to try to defuse the crisis and pave the way for the resumption of stalled aid-for-disarmament talks.