SEOUL - North Korea is assembling a missile that could hit U.S. soil and may test-launch it as early as this month, a newspaper reported, as a U.S. envoy on Wednesday urged Pyongyang to cease provocations and return to disarmament talks.

The hermit state's nuclear test last week, putting it closer to having a working atomic weapon, has already prompted U.S. and South Korean forces to raise their military alert for the divided peninsula.

North Korea, which began ratcheting up regional tensions when it fired a long-ranged rocket over Japan in April, also test-fired a barrage of short-range missiles last week and threatened to attack the South.

The ICBM (intercontinental ballistic missile) is covered up so it's tough to be absolutely clear but it looks similar to the Taepodong-2 fired in April but longer, the JoongAng Ilbo quoted a South Korean government source as saying.

The April launch of a rocket that flew more than 3,000 km (1,800 miles) but short of the 4,800 km needed to strike Alaska triggered tightened U.N. Security Council sanctions that Pyongyang called unacceptable, threatening to launch an ICBM unless the world body apologized.

The newspaper said the missile has been moved to a hangar for assembly at the North's newly built west coast Tongchang-ri missile range for a launch that could come as early as mid-June.

The launch area is about 90 km (55 miles) west of Yongbyon, the North's main nuclear complex. However, weapons experts say the impoverished state does not yet have the technology to turn its nuclear material into a warhead to put onto a missile.

It also looks ready to test launch three to four mid-range missiles with ranges that can hit all of South Korea and most of Japan, South Korean lawmakers said on Tuesday after a defense briefing.

Now is the time for North Korea, rather than continuing to take more dangerous and provocative actions, to recognize that the better course is to re-engage and to get back on the path of negotiations toward denuclearization, U.S. Deputy Secretary of State James Steinberg said after meeting foreign ministry officials in Seoul.

DYNASTIC CHANGE

Local financial markets appeared to take comfort from a growing view that the provocative behavior was aimed at resolving domestic issues rather than signaling impending military action.

Yes, North Korea's actions cause worries. But investors do not think they are detrimental. Most think their latest actions have something to do with strengthening Kim's successor, said Y.S. Rhoo, a market analyst at Hyundai Securities.

The main Seoul stock index has increased about 9 percent since the April rocket launch. Foreign investors have been net buyers of stocks for 14 days in a row, the longest buying streak in four years.

The growing military tension has come amid reports that North Korean leader Kim Jong-il, whose country's economy has only grown weaker under his military first rule, is moving to anoint his youngest son as heir to the family dynasty.

A number of analysts said the latest military grandstanding was designed to give Kim, whose power base stems from his support for the military, greater leverage over power elites at home to nominate his successor.

A senior U.S. official in Washington said now that Kim appears to have set up Kim Jong-un as official heir, the North may start to reduce tensions.

Experts said North Korea, thought before the May test to have enough plutonium for six to eight nuclear bombs, would need extensive additional testing to develop a working nuclear device it could mount on a warhead.

The Pentagon says its own tests show it is now better able to shoot down any long-range missiles from North Korea.

(Additional reporting by Park Jung-youn; Writing by Jon Herskovitz; Editing by Jonathan Thatcher and Alex Richardson)

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