By Jack Kim and Jon Herskovitz
SEOUL (Reuters) - Talks between North and South Korea over the operations of a lucrative joint industrial project have ended without agreement, compounding Pyongyang's economic woes and increasing tension on the troubled peninsula.
The talks that ended late on Wednesday were a rare point of contact and came as the destitute North has turned up its heated rhetoric towards its neighbour, while also signalling it could end its year-long boycott of international nuclear disarmament talks.
More then 110 small- to medium-sized South Korean companies use cheap North Korean labour at the Kaesong factory park, just north of the border, to make products such as cooking pots, clothes, shoes and watches.
The two sides will hold another round of talks on February 1 after hitting snags on North Korea's demands for higher wages for its 40,000 workers there and an increase in rents paid by South Korean firms, a Unification Ministry official said on Thursday.
"There were many stumbling blocks laid out by the North during this session," the chief of the South Korean delegation, Kim Young-tak, told reporters in Seoul.
The Kaesong complex has remained fully operational despite a range of disputes between the neighbours.
Kaesong provides a vital source of revenue for North Korea's broken economy, which is being squeezed by fresh U.N. sanctions imposed after its nuclear test in May 2009. It has been reaching out to the South over the past months to step up deals that once earned it tens of millions of dollars a year.
North Korea's wobbly economy has also been hit by currency control measures it imposed at the end of last year that made it more difficult for its impoverished people to buy goods.
The move has sparked inflation and a decrease of goods on the shelves, leading to reports of unrest among an already impoverished public who are having more trouble buying goods. Analysts said this poses significant political risk for North Korean leader Kim Jong-il.
AID LINKED TO DENUCLEARISATION
The companies receive tax breaks and other incentives from the South to set up there and pay workers a basic salary and social welfare benefits that total $70 (43 pound) a month.
South Korean President Lee Myung-bak has put pressure on the North by cutting off handouts once worth about 5 percent of the North's estimated $17 billion a year economy, saying aid will come when his neighbour scraps its nuclear ambitions.
North Korea in the past few days has said it could only end a year-long boycott of wider nuclear talks once U.N. sanctions were removed and the United States discussed with it a peace deal to replace the armistice that ended the 1950-53 Korean War.
Analysts say the North is trying to win concessions to lure it back to the stalled six-way, disarmament-for-aid talks by attaching conditions to its return and making threats to rattle security in the economically vital North Asia region.
Rhetoric has been increasing from both sides of the border in the past week.
South Korea's defence minister said on Wednesday Seoul would be willing to launch a pre-emptive strike to halt an imminent nuclear attack by North Korea, comments that will likely lead to a sharp rebuke by Pyongyang.
The North threatened on Friday to cut off all dialogue with
the South and launch a "holy war" against South Korean leaders for planning how they will manage North Korea if its leadership crumbles.
(Additional reporting by Christine Kim; Editing by Paul Tait)
