SEOUL - North Korea said on Monday it would reopen its border with the South, ending a self-imposed 9-month blockade on a vital source of cash for its leaders as their ravaged economy is squeezed by tightening U.N. sanctions.

It is the latest step by the hermit North to end near complete isolation by the outside world over its months of military grandstanding, including a second nuclear test in May.

But in a reminder of tensions on the peninsula, North Korea's KCNA news agency followed the report on the border deal with one warning of a merciless and prompt annihilating strike, including nuclear weapons, if U.S. and South Korean military drills that started on Monday infringe on its sovereignty.

The agreement to ease restrictions on the border, effectively closed since last December, and restart lucrative tourism to the North came during four-hour talks between the reclusive state's ruler Kim Jong-il and the head of the South Korean Hyundai Group.

(Kim Jong-il) said to tell him all that I wanted, so I did, Hyundai's Hyun Jeong-eun told reporters on arrival back in the South after her trip to Pyongyang, at the North's invitation, to seek the release of a worker detained for nearly five months for insulting the North Korean leadership.

Hyun, who described the meeting over lunch on Sunday as convivial, said Kim also agreed to talks over the fate of four South Korean fisherman detained late last month after straying into North Korean waters.

The Hyundai Group runs tourism to the North and operates the Kaesong industrial park just across the border and an important source of income for Pyongyang's leadership.

The group is linked to one of the most powerful corporate families in South Korea, one of whose senior members is also a close political ally to President Lee Myung-bak.

Hyun's visit followed hot on the heels of one earlier in the month by former U.S. President Bill Clinton, who also met Kim, to win the release of two jailed American journalists.

Wu Dawei, the top nuclear envoy from China, the closest North can claim as a major ally, is planning to go to Pyongyang later on Monday in a bid to restart the six-country talks on ending North Korea's atomic ambitions, South Korea's Yonhap news agency quoted a diplomatic source as saying.

North Korea ... wants a better relationship with the U.S. In order for that to happen, they must have a well-established relationship with South Korea, said Cho Myung-chul, an expert on North Korea at the Korea Institute for International Economic Policy in Seoul.

Relations between the two Koreas, technically at war for more than half a century, have become increasingly bitter after the South's conservative president took office 18 months ago, ending years of aid unless his neighbor gave up nuclear weapons.

SANCTIONS BITE

Analysts say tightened U.N. sanctions over its military provocations are starting to bite, especially its profitable weapons exports.

Yang Moon-soo, a professor at the University of North Korean Studies, estimated that Pyongyang had earned about $30 million last year from its business with the Hyundai Group.

Although this might not look like a great amount to South Korea, it means a great deal to North Korea.
Adding to the North's problems are reports that its 23 million population, routinely on the edge of famine, could be facing another poor harvest.

North Korean state TV reported that flooding in recent weeks had damaged farmland.

Though recent nuclear and missile tests have infuriated the international community, analysts say they have helped Kim's stature at home, notably with his hard-line military.

North Korea's media has also been careful to portray both recent visits as tribute to iron leader Kim, 67, whose health is the subject of intense speculation and believed to be trying to ensure his youngest son becomes the third generation in the family to head the destitute communist dynasty.

Tours across the Cold War's last frontier have ground to a halt last year and the industrial park itself has looked under threat as relations between the two, technically at war for more than half a century, have worsened.

Under the latest agreement, land passage across their heavily armed border will be resumed, allowing normal traffic to the Kaesong factory park.

They agreed that officials from both sides would start talks on resuming tourism to the scenic Mount Kumgang resort, halted a year ago after a North Korean soldier shot dead a tourist from the South who had wandered into a military area.

Pyongyang also agreed to let Hyundai launch tours to Mt Paektu, a sacred peak in Korea, and for the resumption in October of reunions of families separated by the 1950-53 Korean War.

(Additional reporting by Cho Meeyoung and Christine Kim; Editing by Sanjeev Miglani)

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