North Korea proposed a summit with South Korea even after tensions mounted dramatically over the deadly sinking of one of Seoul's warships, a newspaper reported.

The impoverished communist state made the proposal last month in an apparent bid to secure economic aid from South Korea but the idea was rejected by Seoul, the Dong-A Ilbo newspaper reported Wednesday, quoting an unnamed high-ranking official.

"North Korea sent us a request to hold an inter-Korean summit even after it sank the (warship)," the official said, referring to what South Korea says was an attack by North Korea on a corvette in March that killed 46 sailors.

"This is its typical carrot-and-stick strategy. North Korea superficially proclaims military retaliation against sanctions imposed on it, while suggesting an inter-Korean summit under the table."

But the South's unification ministry denied the report.

"The report is not true," spokeswoman Lee Jong-Joo told reporters. "North Korea has yet to change its attitude."

Pyongyang had wanted Seoul to resume economic assistance before any summit between President Lee Myung-Bak and its leader Kim Jong-Il, Dong-A said.

It called for a summit last December, designating then South Korean labour minister Yim Tae-Hee as dialogue partner, but Seoul failed to give a clear answer to Pyongyang for months, the paper said.

Yim, one of Lee's close confidants, reportedly held a secret meeting with a North Korean official in Singapore late last year in an unsuccessful attempt to arrange a summit.

After Yim became chief of presidential staff last month, the North asked Seoul to send someone to the North's border city of Kaesong for discussions on the proposed summit, Dong-A said.

A South Korean official did travel to Kaesong but told North Korean officials that Seoul would not accept Pyongyang's proposal, citing cross-border tensions, it said.

Seoul and Pyongyang have been engaged in a war of words since the March sinking of the Cheonan near the disputed sea border, which a multinational inquiry found was caused by a North Korean torpedo.

The two neighbours held a first-ever summit in 2000 and a second followed in 2007, when Seoul's left-leaning leaders were practising a "sunshine" aid and engagement policy with Pyongyang.

Lee, a conservative, took office in 2008 and linked major aid to progress in the North's nuclear disarmament, sparking anger in Pyongyang. Nevertheless, the impoverished North put out peace feelers about a year ago.

In a speech Sunday, Lee outlined a three-step plan for reunification with the North, starting with Pyongyang giving up its nuclear arsenal.

But the North blasted Lee's plan as "ridiculous rhetoric to force the DPRK (North Korea) to disarm itself".

"The vituperations let loose by the traitor are tantamount to a declaration of an all-out confrontation to bring down the system in the DPRK," the Committee for the Peaceful Reunification of Korea said in a statement Tuesday.

South Korea and the United States launched their annual Ulchi Freedom Guardian joint exercises Monday, the latest in a series being staged by the South either alone or with the US.

The Pentagon on Wednesday confirmed a South Korean press report that Washington and Seoul were planning a joint anti-submarine exercise in the Yellow Sea in September.

"We are going to continue a series of exercises that are of a defensive nature and are designed to send a clear message to North Korea," said Pentagon spokesman Bryan Whitman.

"The next exercise in that series will focus on anti-submarine warfare. The exercise will be conducted in the waters off the western coast of the Korean peninsula and begin early next month."

The North's foreign ministry warned Wednesday that Pyongyang "is ready both for dialogue and war and has all means and methods to defend itself".

"The US and the South Korean authorities should understand that there is a critical point in the tension, too, and should not calculate they can evade the blame for the explosive situation," a ministry spokesman said, in a statement quoted by state media.