North Korea warned Tuesday that South Korean-US war games this month would torpedo efforts to rid the peninsula of nuclear weapons, and vowed to strengthen its atomic arsenal if necessary.

Despite tensions over the exercise the two Koreas went ahead with talks on ways to ease business at their jointly-run Kaesong factory estate, a valuable revenue source for the sanctions-hit North.

The March 8-18 exercise comes "at a time when the international community is growing more vocal than ever before calling for a settlement of the nuclear issue", the official Korean Central News Agency (KCNA) said in a commentary.

"Obviously, this is a deliberate attempt to disturb peace on the peninsula and torpedo the process for its denuclearisation."

Diplomatic efforts are intensifying to revive six-nation nuclear disarmament negotiations which the North abandoned last April, a month before staging a second nuclear test.

Before it returns to dialogue, the North calls for UN sanctions to be lifted. It also wants a US commitment to discuss a peace pact to replace the armistice which ended the 1950-1953 war.

The North routinely criticises war games in South Korea as a rehearsal for invasion, while Seoul and its ally Washington say they are purely defensive.

The Key Resolve/Foal Eagle exercise will draw 10,000 US troops stationed in South Korea plus 8,000 from abroad, and an undisclosed number of South Korean soldiers.

KCNA said such exercises would drive "the process for the denuclearisation of the peninsula to a collapse".

"The reality goes to prove how urgent and crucial the conclusion of a peace treaty and the termination of the hostile relations are for finding a solution to the nuclear issue on the peninsula," it said.

Denuclearisation "can never take even a step forward" as long as North Korea and the United States remain technically at war and the US threat of a nuclear conflict remains, it said.

"Should the US persist in its unrealistic moves to stifle (North Korea) in disregard of its realistic proposal, this will only compel it to boost its nuclear deterrent and its delivery means."

Last week the military accused South Korean and US troops of planning a surprise attack under the pretext of the exercise and warned it could respond with atomic weapons.

The communist state has also announced it is holding four South Koreans for illegal entry but has given no details. A South Korean activist has said they entered the North from China.

The two Koreas Tuesday met at Kaesong just north of their heavily fortified border, where 42,000 North Koreans work at 110 South Korean-funded plants.

Seoul unification ministry officials said the North told them it was still investigating the incursion by the four and would notify the South when the probe was completed.

A ministry statement said talks ended without agreement but the two sides decided to set a date for a further meeting later.

It said the North raised political issues such as the upcoming military exercise, the distribution of leaflets by anti-Pyongyang groups and tensions in the Yellow Sea.

Pyongyang demanded that Seoul "stop acts of confrontation and hostility" but the South Korean side refuted the claims.

Previous talks about the estate ended without agreement after the North demanded that pay rises should be the priority rather than relaxed regulations.

Seoul wants South Korean employees at Kaesong to be allowed to use mobile phones and the Internet, and also calls for round-the-clock access by South Koreans to the estate.