SEOUL - The rival Koreas neared a deal to resume reunions of families separated by the Korean War at a rare meeting on Wednesday that follows conciliatory moves made by the North after it was hit by sanctions, reports said.

The inter-Korean meeting held by Red Cross Societies in the North Korean resort of Mt. Kumgang is the first on humanitarian issues in about two years and comes after Pyongyang cut ties with Seoul in anger at the hardline policies of its president.

Analysts said the U.N. sanctions imposed on the North to punish it for carrying out a nuclear test in May could be squeezing its already depleted coffers and leading it to reach out to the South, once a major aid donor.

The two Koreas have proposed holding the reunions for the families split by the 1950-53 war in early October, but the two sides have proposed starting dates three days apart for the highly emotional gatherings, the South's Yonhap news agency reported government officials as saying.

The North suspended the reunions, which were last held about two years ago.

The key issue on the agenda for this meeting is the reunion of separated families, South Korea's chief delegate to the talks, Kim Young-chel, told reporters before leaving Seoul.

Relations on the troubled peninsula turned chilly after President Lee Myung-bak took office in Seoul about 18 months ago. He halted unconditional handouts and linked resuming the South's largesse to the North ending its nuclear arms ambitions.

Lee had his first chance to tell North Korean officials of his policy face to face on Sunday, when he met a delegation that had flown to Seoul to mourn former President Kim Dae-jung, who was buried the same day.

North Korea has also released two U.S. journalists and a South Korean worker it had held in separate incidents, ended restrictions on border crossings and said it wanted to restore suspended tours for South Koreans to its state.

RISK DISCOUNT

But analysts and traders said the softening tone was still not enough to lift the risk discount that weighs on South Korean financial markets because of the security threat posed by a confrontational North.

South Korea's geopolitical factor is still priced in, and the latest friendlier gestures by the North do not change that, Samsung Securities market analyst Hwang Keum-dan said.

However, a softer approach by the North certainly comes as a positive development and should be an added help for market sentiment.

A U.S. official charged with enforcing U.N. sanctions on the North for its defiant missile and nuclear tests said the sanctions were having an impact, though it was still too early to gauge precisely.

We've seen some indication that the overall effort is working, Philip Goldberg told reporters in Tokyo. I don't want to say whether or not, or judge exactly how much and what kind of result we can expect at this point.

Just under 20,000 Koreans from both sides have taken part in the brief reunions of separated family members since the two Koreas tried to improve ties in 2000 after their first summit meetings since the war.
Hundreds of thousands of others still wait to hear through the Red Cross whether parents, siblings and children are alive on the other side of the world's most heavily militarized border.

South Korea has urged the North through the Red Cross talks to explain the whereabouts of more than 1,000 South Korean prisoners of war and civilians believed to be held in the North.

(Additional reporting by Jon Herskovitz, Jungyoun Park and Kim Yeon-hee in Seoul and Yoko Kubota in Tokyo; Editing by Jonathan Thatcher and Tim Pearce)

South Korea