SEOUL - South Korea's president on Saturday called on North Korea to reach a deal to cut conventional arms amassed on their heavily fortified border and renewed a pledge to provide aid if the impoverished North ends its atomic ambitions.

North Korea, which has harshly criticized President Lee Myung-bak, this week released a South Korean worker it had held captive since March in a rare conciliatory gesture analysts said could herald a defrosting of ties.

If the North and South reduce conventional weapons and troops, enormous resources will be freed up to improve the economies on both sides, Lee said in a speech marking the anniversary of the end of Japanese colonial rule over the Korean peninsula in 1945.

The rival Koreas, technically still at war, have more than 1 million troops positioned near the land-mine strewn Demilitarised Zone buffer that has divided the peninsula since fighting in the 1950-53 Korean War ended with a cease fire.

Now is the time for the North and South to come to the table and talk about these issues, Lee said.

Impoverished North Korea has been angered by Lee's policy of ending unconditional handouts -- once equal to about 5 percent of the North's estimated $17 billion a year economy -- and instead linking aid to progress Pyongyang makes in ending the security threat it poses to the region.

HYUNDAI CHAIRWOMAN'S VISIT

Lee has said since he took office in February 2008 that he was willing to provide a massive aid package to the North and help rebuild its broken economy in return for Pyongyang ending its nuclear arms program.

Separately, the chairwoman of the powerful Hyundai Group, one of the few South Korean executives to have direct dealings with North Korean leader Kim Jong-il, has been in Pyongyang most of this week to secure the release of the Hyundai worker.

Yonhap news agency said on Saturday Hyundai Chairwoman Hyun Jeong-eun had decided to extend her stay in the North and would come back to Seoul on Sunday.

She has also been trying to arrange a meeting with Kim to discuss the resumption of tourism at a mountain resort in North Korea run by a Hyundai affiliate that was shut down a year ago after a North Korean soldier shot dead a South Korean tourist who had wandered into a military area.

The resort and factory park run by Hyundai have been vital sources of legitimate foreign currency for North Korea, which was hit by U.N. sanctions for its nuclear test in May aimed at cutting into its arms trade, another key income source.

Last week, former U.S. President Bill Clinton went to Pyongyang where he met Kim and won the release of two U.S. journalists the communist state had held since March on charges of illegal entry.

(Editing by Bill Tarrant)

South Korea