China will stick to gradual reform of its yuan currency, President Hu Jintao told the United States at the start of high-level talks on Monday in which North Korea emerged as a point of potential contention.

Hu, speaking at the opening session of the U.S.-China Strategic and Economic Dialogue (S&ED), said the two global powers needed to enhance economic policy coordination and work together to promote full economic recovery.

The world's biggest and third biggest economies are seeking to steady relations after a burst of tensions early this year, and while Hu broke no new ground on the currency dispute that has divided them, he set a generally conciliatory tone for the two days of talks.

China will continue to steadily advance reform of the renminbi exchange rate formation mechanism following the principles of being independent, controllable and gradual, he said. The renminbi is another name for the yuan.

Hu said his government wanted to expand domestic demand to create more balanced growth, something that Washington -- worried about its yawning trade deficit with China -- has also urged.

At the meeting, Treasury Secretary Timothy Geithner urged Beijing to work together to reduce trade barriers and develop a more balanced global economy.

Geithner indirectly urged China to ease up on its indigenous innovation policies aimed at giving Chinese companies a larger share of new cutting-edge technologies developed in China.

But the vows of closer economic coordination were partly offset by Secretary of State Hillary Clinton's effort to coax China into joining international pressure on North Korea.

South Korean President Lee Myung-bak said on Monday that he would take Pyongyang to the U.N. Security Council after his government found North Korea was responsible for torpedoing its warship, the Cheonan, in late March, killing 46 sailors.

China is the sole major backer of North Korea, and has not publicly criticized Pyongyang over the sinking, instead issuing broad calls for restraint. Earlier this month, China hosted the North's leader, Kim Jong-il, on a visit.

Today we face another serious challenge provoked by the sinking of the South Korean ship, Clinton told the meeting. We must work together to address this challenge and advance our shared objectives for peace and stability on the Korean peninsula.

Tensions flared between Beijing and Washington in the first months of 2010, when China denounced U.S. criticism of its Internet censorship, Washington's arms sales to Taiwan, and President Barack Obama's meeting with the Dalai Lama, Tibet's exiled leader.

Beijing considers Taiwan a part of its territory and Hu said it was important countries respected one another's sovereignty.

QUIET DISCUSSION OF YUAN

Beijing officials have said they want only quiet discussion of U.S. complaints the Chinese currency is held too low in value, giving Chinese manufacturers an unfair advantage.

The Obama administration so far appears willing to go along in the hope a quieter approach will give Beijing more political space to let its currency appreciate. Geithner did not mention the yuan issue in his opening remarks to the S&ED.

China's main official newspaper, the People's Daily, on Monday repeated the government's position that a rise in the yuan would not help the U.S. economy anyway.

Appreciation of renminbi will not solve the imbalance in China-U.S. trade and it will not solve U.S. employment problems, said a commentary in the paper.

China is advancing reform of the renminbi exchange rate formation mechanism based on its own economic development needs.

The annual U.S. trade deficit with China fell to $226.8 billion in 2009, down from a record $268.0 billion in 2008. But the Obama administration is keen to lift exports, and the deficit remains a point of friction with Beijing.

U.S. officials have sought to concentrate attention on policies they claim may unfairly impede U.S. companies hunting for customers in China.

(Additional reporting by Chris Buckley; Editing by Nick Macfie)

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