Q+A: What do South Korea and the U.S. want from the North ?

SEOUL (Reuters) - Secretary of Defense Robert Gates and Secretary of State Hillary Clinton hold a high-profile meeting in Seoul this week to showcase Washington's commitment to 60 years of alliance with South Korea.

The following are some questions about where South Korea and the United States stand on North Korea, how their positions shape Pyongyang's policy and how that in turn affects political risks faced by Seoul and Washington.

WHAT DOES SOUTH KOREA WANT?

An apology from North Korea for torpedoing its warship in the dead of night in March, killing 46 men. Seoul also wants North Korea to demonstrate it genuinely wants to make a change, by taking steps to end its nuclear program under a 2005 deal with five regional powers.

But President Lee Myung-bak is faced with a dilemma as he passes the halfway point of his single five-year term without any signs that his tough posture toward North Korea has yielded results.

The sinking of the South Korean ship and the international response showed the limits of trying to punish the North in the face of China's backing of its communist ally.

Some analysts say Lee will take the ship incident not as a chance to further toughen his policy but instead to moderate it and find a way to begin dialogue with Pyongyang.

WHAT DOES THE UNITED STATES WANT?

Washington realizes getting the North to scrap its nuclear program entirely is nearly impossible. Nonproliferation is increasingly the focus. It wants to make sure North Korea does not achieve the level of proficiency to manufacture nuclear arms that are marketable. It does not want Pyongyang to sell weapons of mass destruction to groups, as well as nation states, that harbor aggressive intent against U.S. interests and its allies.

The last thing that Washington will do it make a huge financial commitment for a deal to disarm the North completely when it realizes that is not going to happen. This is why the United States will not negotiate with the North bilaterally.

It will instead continue in the six-party format. It will try to spread out the burden and responsibility among itself, South Korea, Japan, Russia and China, which will also help hold the North accountable.

HOW WILL NORTH KOREA RESPOND

North Korea hates being ignored. North Korea's strategic importance is measured by the potential risk it poses to the security of a region worth one-sixth of the world's economy. It knows how to edge tension just high enough to suck regional powers into negotiations, only to walk away from whatever commitment it made.

Pyongyang may be up to its old tricks. It has called for the restart of six-party nuclear disarmament talks that itself declared dead just over a year ago. Seoul and Washington will have little choice but to give in, especially as China, the host of the forum, also wants its resumption.

Pyongyang will likely play out its negotiating card long enough to ensure that domestic woes subside and it can put in place a process to hand over power to leader Kim Jong-il's young son to ensure a dynastic succession.

WHAT DO MARKET PLAYERS LOOK FOR?

Possibility of an armed conflict. South Korea's President Lee is mindful of how any development would impact its own economy and pose risks to its powerful neighbors in North Asia. A skirmish, like the deadly gunfights in disputed waters off the west coast in 1999 and 2002, or along the military border has the potential to flare up into a greater conflict.

The greatest risk to investors would be if Seoul, or any regional power, miscalculates the propensity of Pyongyang to take differences to the brink, underestimates that it is in its nature to wage provocations, not coexist with neighbors in harmony.