Q+A: Why does North Korea want to cut ties with South?

By Jon Herskovitz

SEOUL (Reuters) - Destitute North Korea on Thursday threatened to end all relations with South Korea, a major source of aid and cash, in anger at the hardline policies of its conservative president.

Below are some questions North Korea's latest move:

* Why is North Korea doing this?

The North, with an annual economy estimated at about $20 billion, has seen aid from the South cut since conservative president Lee Myung-bak took office in February, pledging to make it more difficult for the North to receive handouts.

North Korea, with a history of brinkmanship, may feel it can increase pressure on Lee to change without risking much because aid has already been cut.

* Why now?

The hermit state reached a compromise last weekend to save a disarmament-for-aid deal, which gives it a better chance at tapping into international trade and finance.

North Korea's improved standing in the outside world could help it raise its crippled industrial base and possibly make it easier for overseas investors to tap into its mineral wealth.

By acting now, the North may feel it can isolate South Korea in the international nuclear negotiations and force it to return to the days of unconditional aid and investment that its wealthy neighbor once provided.

* What does the North stand to lose?

So far, the food-short country has lost out on about 400,000 metric tons to 500,000 metric tons of rice and about 300,000 metric tons of fertilizer the South once provided. Direct South Korean aid to the North peaked at 381 billion won ($307 million) in 2007.

The South has suspended tourism at the Mount Kumgang resort, located in the North and operated by an affiliate of the South's Hyundai Group, after a North Korean soldier shot dead a South Korean housewife in July who wandered into a military area.

North Korea received a fee from each visitor who entered and a cut on money spent for hotels and meals that amounted to tens of millions of dollars a year.

The North could also take a big hit if it pulls the plug on a joint factory park with the South located in Kaesong, just north of the border. Scores of South Korean companies have set up shop there, paying the North tens of millions of dollars a year in wages and other expenses.

Lee has not implemented a development plan reached last year by his predecessor at an inter-Korean summit that estimates said could be worth more then $10 billion. Lee has outlined a massive investment plan for the North if it scraps its nuclear arms.