SEOUL North and South Korean envoys failed on Friday to resolve a dispute over Pyongyang's demands for salary and rent increases at a joint factory park in the communist state that is one of its few sources of hard cash.
The talks came a day after American officials said the U.S. Navy was tracking a North Korean ship under new U.N. sanctions that bar Pyongyang from trading in weapons, including missile parts and nuclear material.
Destitute North Korea may be looking to launch a long-range missile toward Hawaii in the coming weeks, news reports also said, which could further stoke tensions after its May 25 nuclear test that put it closer to having a working atomic bomb.
The rocket launch would be in defiance of U.N. resolutions but could be part of efforts to consolidate leader Kim Jong-il's power in preparation for succession in Asia's only communist dynasty, South Korean officials say.
Previous rounds of talks between North and South Korean officials over the Kaesong Industrial Complex have hit snags over money and Pyongyang's refusal to meet Seoul's demands to release a South Korean worker held at the park for supposedly insulting the North's communist system.
North Korea repeated its demand for higher wages and lease payments but offered to lift some of the traffic restrictions that slowed the movement of materials and workers, said Chun Hae-sung, a South Korean Unification Ministry spokesman.
Officials will meet again on July 2 for more talks.
North Korea has demanded wages of $300 a month per person for the about 40,000 North Koreans employed in Kaesong, up from around $70 now. The North also wants lease payments of $500 million over 50 years, an increase of more than 30 fold from the current deal.
North Korea in May said it was cancelling all wage, rent and tax agreements at Kaesong in what analysts said was likely a bid to squeeze more money out of the more than 100 South Korean firms that use the cheap labor and land there.
MISSILES AND SHIPS
The U.S. monitoring of the North Korean vessel, which left a North Korean port on Wednesday, is the first under the U.N. sanctions adopted last week after Pyongyang conducted a nuclear test and warned it could fire another intercontinental ballistic missile.
U.S. officials declined to say what the ship, the Kang Nam, might be carrying but said it had become "a subject of interest."
South Korea's coastguard would not comment on where the vessel might be and what it might be carrying.
"North Korea will endlessly try to export arms. They are unable to shake this thought off their minds because exporting arms is a very profitable business compared to other goods," said Cho Myung-chul, an expert on the North's economy at the South's Korea Institute for International Economic Policy.
The U.S. Treasury Department warned banks on Thursday that North Korea may increasingly try to use cash transactions to evade U.N. sanctions aimed at cutting off financing to its nuclear program.
U.S. Defense Secretary Robert Gates said Washington was concerned about the possibility of North Korea firing off more missiles, possibly toward Hawaii.
"We're obviously watching the situation in the North with respect to missile launches very closely, and we do have some concerns if they were to launch a missile ... in the direction of Hawaii," he said.
"Without telegraphing what we will do, I would just say we are in a good position -- should it become necessary -- to protect American territory."
Gates said that as a precaution he had directed the redeployment of anti-missile assets in the Pacific region, including advanced radar and other defensive systems capable of bringing down medium-range ballistic missiles.
North Korea in April fired what it said was a rocket to put a satellite in orbit, but regional powers said the launch was actually a disguised test of the long-range Taepodong-2 missile, designed to fly as far as U.S. territory.
The rocket flew about 3,000 km (1,860 miles), well short of the 7,000 km needed to take it to Hawaii.
(For a graphic on North Korea's missile systems, click here
(Additional reporting by David Morgan in Washington and Christine Kim in Seoul; Editing by Jon Herskovitz and Dean Yates)