U.S. official says not ruling out eventual direct talks with North Korea

By Tim Kelly and Michelle Nichols

TOKYO/UNITED NATIONS (Reuters) - The United States is not ruling out the eventual possibility of direct talks with North Korea, Deputy Secretary of State John J. Sullivan said on Tuesday, hours after Pyongyang warned nuclear war might break out at any moment.

Talks between the adversaries have long been urged by China in particular, but Washington and its ally Japan have been reluctant to sit down at the table while Pyongyang continues to pursue a goal of developing a nuclear-tipped missile capable of hitting the United States.

"Eventually, we don’t rule out the possibility of course of direct talks," Sullivan said in Tokyo after talks with his Japanese counterpart.

"Our focus is on diplomacy to solve this problem that is presented by the DPRK. We must, however, with our allies, Japan and South Korea and elsewhere, be prepared for the worst, should diplomacy fail," he said.

DPRK stands for North Korea’s official name, the Democratic People’s Republic of Korea.

In Washington, State Department spokeswoman Heather Nauert highlighted U.S. diplomatic efforts by Sullivan and others to pressure North Korea to give up its weapons programmes by encouraging implementation of international sanctions.

Nauert told a regular briefing that sanctions were choking off money supply to North Korea and it was feeling the effect, but even so Pyongyang was "not showing that they are anywhere near desiring to have talks."

"We hope that this diplomatic approach will be successful in the end," Nauert said, while adding of Secretary of State Rex Tillerson: "He's got to be the most optimistic guy in the U.S. government."

Tension has soared following a series of weapons tests by North Korea and a string of increasingly bellicose exchanges between U.S. President Donald Trump and North Korean leader Kim Jong Un.

Leaflets, apparently from North Korea, calling Trump a "mad dog" and depicting gruesome images of him have turned up across central Seoul, adding an unusually personal element to North Korean propaganda.

"The situation on the Korean peninsula where the attention of the whole world is focused has reached the touch-and-go point and a nuclear war may break out any moment," North Korea’s Deputy U.N. Ambassador Kim In Ryong told a U.N. General Assembly committee on Monday.

"As long as one does not take part in the U.S. military actions against the DPRK (North Korea), we have no intention to use or threaten to use nuclear weapons against any other country," according to Kim's prepared remarks for the discussion on nuclear weapons. Kim did not read that section out loud.

South Korea and the United States began week-long joint naval drills in the waters around the Korean peninsula on Monday, involving about 40 ships from both militaries, including the nuclear-powered USS Ronald Reagan aircraft carrier, South Korea's defence ministry said.

North Korean state media said on Tuesday the allies' "desperate efforts" to block North Korea's advance only showed it should continue its nuclear programme "to the last."

"The DPRK has been fully ready for all the U.S. is resorting to, including sanctions, pressure and military option, as it has the tremendous nuclear force for self-defence and irresistible strength of self-reliance and self-development," the official KCNA news agency said in a commentary.

Asked about the North Korean envoy's warning of nuclear war, Chinese Foreign Ministry spokesman Lu Kang said it would not be in anyone's interest.

"China still hopes that all parties, in this situation where things on the Korean peninsula are highly complex and sensitive, can exercise restraint and do more to benefit the lowering of tensions in the region," Lu told a daily news briefing.

The U.N. Security Council has ratcheted up sanctions on North Korea over its nuclear and ballistic missile programmes since 2006.

The most recent U.N. sanctions banned exports of coal, iron ore and seafood, aimed at cutting off a third of the North's total annual exports of $3 billion.

Experts say North Korea has been scrambling to find alternative sources of hard currency to keep its economy afloat and advance its weapons programme.

On Monday, the head of cyber-intelligence at BAE Systems Plc <BAES.L> said North Korea's Lazarus hacking group was probably responsible for a recent cyber heist in Taiwan.

Taiwan's Central News Agency said last week that hackers had sought to steal some $60 million from the Far Eastern Bank, but it had recovered all but $500,000.

BAE Systems and others have previously linked Lazarus to an $81-million cyber heist at Bangladesh's central bank last year.

North Korea has recently allowed citizens as young as 12 to bet on horse races for the first time as the country scrambles to unearth new sources of hard currency amid intensifying international sanctions.

Punters had previously risked three years' hard labour for gambling in the tightly controlled state, but the growing importance of private markets means more people have money to spend on leisure, experts said.

Lee Sang-keun, a researcher at the Institute of Unification Studies at Seoul's Ewha Womans University, said wealthy North Koreans had to pay for such activities with Chinese or U.S. currency.

"Many North Koreans make lots of money from the market, dine at hamburger restaurants and go shopping, all of which help fatten regime coffers. That’s part of the reason why the regime still has some financial latitude, despite international sanctions," Lee said.

(Reporting by Tim Kelly and Michelle Nichols; Additional reporting by Jim Finkle in TORONTO, Hyonhee Shin, Christine Kim and James Pearson in SEOUL and David Brunnstrom in WASHINGTON; Writing by Lincoln Feast; Editing by Clarence Fernandez and James Dalgleish)