NORTH KOREA FORECLOSES REPRISAL AS SOUTH CONDUCTS DRILL

DESPITE early threat, North Korean guns yesterday stood silent as the South held military drills near their border and, easing tension further, the Cable News Network (CNN) reported that Pyongyang had agreed to the return of nuclear inspectors.

North Korea had threatened to strike back if its neighbour went ahead with the live-fire drill, which lasted just over 90 minutes with near-constant artillery fire that shook air raid bunkers on the South Korean island of Yeonpyeong.

'I can't exactly tell how many have been fired, some are distant and some are noisy. The bunker is shaking and people here are worried, including myself,' said a Reuters witness on the island.

On November 23, the last time Seoul conducted firing drills from Yeonpyeong close to the disputed maritime border off the west coast of the Korean peninsula, Pyongyang retaliated by shelling the island, killing four people, in the worst attack on South Korean territory since the Korean war ended in 1953.

The marines' exercise came hours after a UN Security Council meeting on the Korean peninsula crisis ended in deadlock, with Russia and China resisting an explicit condemnation of the North for last month's attack.

Despite that, a diplomatic breakthrough looked possible after a report that North Korea told U.S. troubleshooter Bill Richardson it would accept the resumption of international inspections of its nuclear programme.

New Mexico Governor Richardson, visiting Pyongyang to try to ease tensions, won agreement from North Korea to allow UN nuclear inspectors to return, according to CNN which has a team traveling with him.

Pyongyang 'agreed to allow International Atomic Energy Agency personnel to return to a nuclear facility in the country and agreed to negotiate the sale of 12,000 … fuel rods and ship them to an outside country, presumably to South Korea,' CNN said, quoting correspondent Wolf Blitzer in Pyongyang.

'The North has also agreed to consider Richardson's proposal for a military commission between the United States, North Korea and South Korea as well as a separate hotline for the Koreas' militaries.'

The South Korean Foreign Ministry said it could not confirm the agreement.

'We do not have the specific details yet, so it is too early to make an official evaluation,' a spokesman said.

Richardson was visiting in an unofficial capacity, the traditional means of communication between the two sides, but it was unclear whether the reported agreement would ease tensions, particularly given Pyongyang's poor record of honoring deals.

North Korea expelled inspectors in April 2009 after ripping up a previous disarmament-for-aid agreement.

'It means that they are prepared to give up, at least in part, the plutonium programme, which has been the source of the fuel rods they came up with,' said North Korea expert Kim Yong-hyun of Dongguk University. 'It would be considerable progress, if true.'

However, North Korea last month unveiled major technical progress in uranium enrichment, suggesting another reason it could be willing to end the plutonium programme.

So while North Korea's offers could indicate that, after months of military grandstanding, it is bending to international pressure, they may amount to little more than an empty conciliatory gesture.

Tension ahead of the military drills initially hit Korean markets when they opened yesterday, with the won falling nearly two per cent to a four-week low against the dollar and stocks also down one per cent in early trade.

But shares recouped most of their losses to close down just 0.3 per cent, slightly outperforming the region as a whole, while the won ended local trade higher against the dollar.    Some dealers cited the tensions as a factor helping push gold up by one per cent on international markets.

Sunday's announcement that Seoul would impose a levy on the foreign debt of banks from late 2011 also weighed on markets. The move was Seoul's latest attempt to discourage too much speculative hot money flowing into South Korean assets, a reminder that local markets are bullish despite the tensions.

'The fact that foreign investors are continuing to buy comes as a reassuring sign,' said Kwak Joon-bo, analyst at Samsung Securities.

'Unless North Korea takes actions that are akin to its artillery shelling of the island, the market will be relatively calm.'

Both sides have said they will use force to defend what they say is their territory off the west coast, raising international concern that the standoff could quickly spiral out of control.

Yonhap quoted military officials as saying shells fired in the drill would land more than 10 kilometres (six miles) from the maritime border. But Pyongyang disputes the border and said last week it would be a suicidal provocation for Seoul to hold the exercise.

'The South Korean puppet warmongers going in league with outside forces are getting ever more frantic in their moves for a war of aggression… pushing the situation to the brink of a war,' North Korea's Rodong Sinmun newspaper said.

Wang Min, China's representative at the Security Council meeting, warned that 'the situation on the Korean peninsula is perilous' and defended Beijing's approach to the crisis.

Russia had called Sunday's emergency Security Council meeting to try to prevent an escalation, but major powers failed to agree on a draft statement due to differences over whether to lay the blame on Pyongyang.

'The gaps that remain are unlikely to be bridged,' said Susan Rice, the U.S. ambassador to the UN

Other council diplomats, however, said it was possible the council could return to the issue as early as yesterday.

Western diplomats said China and Russia were pushing for an ambiguous statement that would not have blamed North Korea for the crisis, but would have called on both sides to exercise restraint. Rice said the 'vast majority' of council members did not want an ambiguous statement.