The apparent moves came as South Korea held its latest war games to simulate an infiltration by North Korean troops across the disputed Yellow Sea border, officials said.

Tensions have been high since the North shelled South Korea's frontline Yeonpyeong island on November 23.

Yonhap news agency quoted unidentified South Korean government sources as saying that the North recently lifted a special alert it issued on November 21 for its military forces on the coast near the tense sea border.

"The North Korean military recently withdrew an order for special military readiness it had issued in connection with our Hoguk military drills (in November)," a source was quoted as saying.

The South Korean military and US forces in South Korea had consequently reduced their own alert status by one notch to a normal level, the source said.

South Korean troops have lowered "the level of their alert status by one notch in some areas due to fatigue", a defence ministry spokesman told AFP, adding the move was not related to any political development.

He also said the computerised military exercise involving the South Korean navy and marines "began as planned", declining to give details.

Navy officials said Friday's manoeuvres were designed to enhance the South's capability to repel a surprise landing on islands.

Command posts were involved in the simulated war games but it was unclear whether troops were involved in any physical manoeuvres.

Besides the shelling in November, the North also raised security fears that month by disclosing a uranium enrichment plant to visiting US experts.

But after a difficult year on the Korean peninsula, 2011 started on a more peaceful note.

The North began the year calling for improved relations with Seoul, while South Korean President Lee Myung-Bak Monday also reached out, saying he was open to talks and offering closer economic ties.

Efforts to resume long-stalled nuclear disarmament talks with the North also gained momentum as Beijing urged dialogue and Pyongyang signalled it was willing to return to the negotiating table.

In an unusually cordial statement, carried by its KCNA agency, North Korea said Wednesday the communist nation "courteously proposes having wide-ranging dialogue and negotiations".

But South Korean officials were dismissive of the comments.

Vice Unification Minister Um Jong-Sik said on KBS radio that the North should show seriousness of purpose by acting on its obligations under a 2005 agreement on denuclearisation and apologising for the November shelling and the sinking of a South Korean warship last year.

Amid the more positive tone, Japan's foreign minister called for renewed dialogue on the divided Korean peninsula in Washington on Thursday, but said the North should first take "concrete actions" to lower tensions.

The US special envoy on North Korea, Stephen Bosworth, meanwhile wrapped up a three-nation tour to discuss easing tensions in the region, after stops in Seoul, Beijing and Tokyo to discuss the situation on the peninsula.

And a South Korean newspaper reported that China has proposed a huge investment deal to revive North Korea's faltering economy, amid efforts to get Pyongyang to return to nuclear disarmament talks.

China's state-run Shangdi Guanqun Investment planned to invest about $2 billion in a project to build up a North Korean free trade zone into a regional export base, the JoongAng newspaper said.

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