Q+A - Will North Korea resume nuclear talks? If so, so what?

SEOUL (Reuters) - A senior Chinese envoy is visiting North Korea and was expected to meet leader Kim Jong-il in a visit aimed at prodding the reclusive neighbour back to stalled nuclear disarmament talks.

Following are some questions about whether the North is set to return to disarmament-for-aid talks and what may happen next:

WILL NORTH KOREA RETURN TO NUCLEAR TALKS?

North Korea's moves are often linked to the precarious state of its finances and the economic pressure it is facing now indicates it will likely return to the talks in the hopes of winning aid.

North Korea has attached two conditions to its return and a face-saving compromise would need to be found to resume the talks among the two Koreas, China, Japan, Russia and the United States.

North Korea has called for an end to U.N. sanctions imposed to punish it for detonating a nuclear device in May 2009 and for direct talks with Washington to replace the armistice that ended the 1950-53 Korean War with a peace treaty.

IF TALKS RESUME, WHAT WOULD BE THE NEXT STEP?

North Korea will be expected to resume where it left off when it stepped away from the disarmament-for-aid deal a year ago. This means taking apart its Yongbyon plant that makes arms-grade plutonium and allowing in international nuclear inspectors.

While this would help ease tension, it does not address the progress the North is believed to have made in uranium enrichment, which could give it a second path to a bomb.

Pyongyang may seek a much bigger payoff for giving up its uranium ambitions and this could bog down already sputtering negotiations for several more years.

CAN THE TALKS BREAK DOWN?

Most analysts feel a breakdown is inevitable because there is little reason for North Korean leader Kim Jong-il to ever give up nuclear arms. The North's propaganda has justified years of sacrifice to build a nuclear programme to prevent an invasion from a hostile United States and the weapons are seen at home as the crowning achievement of Kim's military-first rule.

WHAT HAPPENS TO REGIONAL SECURITY IF THE TALKS BREAK DOWN?

North Korea may try to raise the stakes. If the North resorts to its usual brinkmanship, there will likely be missile tests, military provocations towards the South and perhaps another nuclear test.

WHAT IS THE IMPACT ON MARKETS?

Short-lived military grandstanding that results in little to no damage, such as a missile launch or the exchange of artillery fire as happened late last month, usually leads to quick blips in foreign exchange and stock trading that have no lasting impact.

They dampen sentiment and serve as a reminder of the risks of investing in the divided peninsula. Financial analysts say markets would only really worry if there were signs of serious armed confrontation.

WHAT ARE THE ECONOMIC PRESSURES ON PYONGYANG?

U.N. sanctions have cut into the North's arms trade, which estimates said earned the state with a $17 billion a year economy about $1 billion annually.

A currency reform imposed late last year that was aimed at reasserting the government's control over the economy triggered inflation and led to rare civil unrest, putting pressure on Kim to ease some of the economic strain on his impoverished people.

China, the North's main benefactor, is willing to help with economic assistance to prop up Kim's leadership but the U.N. sanctions mean Beijing would be reluctant to do so openly and may only do so on condition that the neighbour returns to the six-party nuclear talks hosted by China.

North Korea may also try warming up to South Korea, which once supplied about $1 billion a year in aid. Seoul cut off the unconditional handouts about two years ago and said aid would only come once the North abandons its atomic ambitions.

(Editing by Jon Herskovitz)