SEOUL - NORTH Korea has approached Seoul about returning South Koreans it has kidnapped and prisoners it has held since the 1953 halt of the Korean War in exchange for economic benefits, Yonhap news agency reported on Monday.

Impoverished North Korea has cut almost all ties with the South in anger at the policies of President Lee Myung-bak, who took office in February and ended what once had been a free flow of unconditional aid to his prickly neighbour.

North Korea hopes the prisoners move will end the chill in ties and provide much needed cash for its economy, Yonhap cited sources well-versed on North Korean issues saying on condition of anonymity.

The report came from Beijing, where the South's unification minister is holding talks with Chinese officials.

North Korea, with an economy estimated at about US$20 billion (S$29 billion) a year, has lost out on at least US$1 billion in aid the South had been supplying each year due to the strain in ties.

'It is impossible to confirm the story,' a South Korean Unification Ministry official in Seoul said.

The United States has called for the end of massive energy aid to the North to punish Pyongyang for not living up to an international nuclear disarmament agreement, which would deal a further blow to its already staggering economy.

South Korea says the North holds more than 1,000 of its citizens, including about 560 prisoners of war (POWs).

President Lee has previously offered the North economic aid in order to win their release.

North Korea faces a further downward spiral in its finances due to a loss of aid held back because it has dragged its heels in nuclear disarmament, a North Korean defector who specialises in the economy of his former home told Reuters last week.

'This creates a vicious circle. The cut in aid means less money to use in other sectors and less industrial production, which inevitably means a further deterioration in the lives of people who already have little,' said Cho Myung-chul, now with the South's Korea Institute for International Economic Policy. -- REUTERS