The agreement, which came nearly a year after the North floated the idea of swapping natural resources for raw materials last July, was hailed in Seoul as a landmark deal to upgrade cross-border economic exchanges that could encourage the North's opening and reforms.

But it remains unclear whether the agreement will be translated into action, because the North's powerful military is seeking to regulate the speed of cross-border reconciliation and cooperation which may threaten the communist system.

Under the nine-point agreement, from August South Korea will provide $80 million worth of raw materials for North Korea's light industries, including clothing, shoes and soap, partly in loans. The North has long suffered from chronic shortages of daily necessities that have partly forced North Koreans to cross the border into China.

In return, North Korea will provide underground resources this year, such as zinc and magnesite, to repay three percent of the South's raw materials, and give the South rights to develop and sell the natural resources.

The other raw materials assistance will be repaid in 10 years, after a five-year grace period, with an interest rate of one percent. Seoul officials said it marks the first time that the South has called for interest payments on loans to the North.

The two Koreas also agreed to "discuss their advance into third countries in the field of natural resource development," according to the joint statement issued at the end of a four-day meeting held in the South's southern resort island of Jeju.

During the talks, the North proposed the South provide capital and technology in its wood and coal business in the Russian Far East as part of joint resources development.

But the South hopes to join forces with the North to explore oil and natural gas reserves in the Russian far east. It also hopes to build pipelines across the Korean peninsula to bring in gas and oil pumped in the Sakhalin fields.

South Korea plans to import 1.5 million metric tons of liquefied natural gas annually from the Sakhalins for 20 years from March 2008. It is also seeking to join energy development in Russia's Far East, bordering North Korea.

South Korea, the world's fourth-largest crude importer and the world's second-largest buyer of LNG, depends entirely on imports for its supplies. The energy-poor country has strived to secure stable energy supplies to prepare for possible disruptions.

The two sides also agreed to jointly develop the Han River's western estuary to extract sand "as soon as the countries take military measures to guarantee safety and ease tension around the border area."

The joint development of the mouth of the Han River, in the Demilitarized Zone separating the two Koreas, was proposed by Seoul's Unification Minister Lee Jong-seok during the latest round of inter-Korean ministerial talks in April.

South Korean officials welcomed the deal, saying it would "upgrade" inter-Korean economic cooperation. The two Koreas currently run two joint projects -- an industrial park in Kaesong and tourism on Mount Kumgang, both just north of the border. The two projects have been run mainly with the South's assistance.

But Tuesday's agreement "raises the level of inter-Korean cooperation to a mutual and commercial relationship from one-sided aid (to the North)," a government official said.

However, it remains doubtful whether the agreement can be carried out because it needs to win support from the North's hard-line military.

The two Koreas lasy month agreed to test-run railways across the heavily fortified border in a deeply symbolic step in generally warming ties. Former South Korean President Kim Dae-jung hoped to use the cross-border railway to reach Pyongyang to meet North Korean leader Kim Jong Il later this month.

But North Korea abruptly canceled the plan, citing a lack of an agreement between the countries' militaries to guarantee the safety of people taking part in the trial runs.

The two Koreas held military talks last month, but failed to reach an agreement on military guarantees, the railway test-runs and differences over the western sea border in which the two Koreas traded naval gunfire which left dozens of casualties on both sides years ago.

The North Korean military has long opposed opening the cross-border railways, claiming it would expose sensitive and secret installations near the border. Analysts in Seoul say the North's military is concerned that the rapid progress in inter-Korean relations may weaken its influence in the country.

During this week's economic talks, the South urged the North to allow the test-running of trains on cross-border rail links, but the North dismissed the demand, citing the lack of military guarantees.

As a result, the two sides agreed to delay the implementation of the agreement until "favorable conditions are created," according to the joint statement.

"The deal will start to take effect only after the train test-runs are implemented across the inter-Korean border with the North's military guaranteeing the safety of cross-border travelers," a Unification Ministry official said.

The ambiguous preconditioning of "favorable conditions" also leaves room for the North to pull out from the agreement later on, North Korea experts say.

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