The Korea Development Institute said in a report that any breakthrough in the nuclear stand-off will be difficult, with the communist state insisting on being treated as a nuclear-armed state.

The North will not have enough food for its people and the economy will shrink in the second half of this year unless it settles the dispute, the institute said.

It earlier predicted that total grain production may reach around 4.29 million tons this year, short of the minimum 5.13 million tons required.

The North quit six-party nuclear disarmament talks in April after the UN Security Council criticised its long-range rocket launch.

Its second nuclear test in May led to fresh sanctions from the Council, which on Thursday extended the measures to cover selected individuals as well as companies.

Relations with South Korea are also severely strained, with one Seoul-funded business project in the North shut down and the other in jeopardy.

The report said Kim's health problems and the issue of power transition have also emerged "as great burdens on the North's economy" because the regime is trying to reassert control at a time of uncertainty.

The institute said tightened curbs on free markets and a proclaimed 150-day campaign to boost production are hampering economic activity.

"When these domestic restraints coincide with a slump in external economic relations, all the burdens will fall on the shoulders of the public," it said.

"With all of these factors combined, the current difficulties confronting North Korea can be compared to conditions back in 1994, when Kim Il-Sung died and a nuclear crisis was sparked," the institute said in its report.

Kim Il-Sung was the country's founding president and father of the current leader.

"In the past the focus was on nuclear disarmament but now it has shifted to a head-on confrontation, with the North demanding it be recognised as a nuclear power and the other five countries (in the six-party talks) unwilling to tolerate the request," the report added.

"It will be much more difficult to reach a breakthrough (than in 1994)."

The United States and the North signed an accord in October 1994 to end the North's nuclear programmes in return for energy aid.

However Dong Yong-Seung, an expert on North Korea's economy, told AFP the current state of the economy is not so bad as in the mid-1990s.

"Most goods traded in marketplaces in North Korea are imports from China. As long as China remains reluctant in enforcing sanctions against the North, the impact on North Korean residents will be limited," he said.

earlier related report
Senior US envoy calls for two-track approach on NKorea
The United States is willing to talk with North Korea "under the right circumstances" but will enforce sanctions aimed at shutting down its nuclear and missile programmes, a US envoy said Saturday.

"What we are trying to do is follow a two-track strategy," Kurt Campbell, assistant secretary of state for East Asia and Pacific affairs, told reporters on arrival in South Korea from Japan.

"Under the right circumstances, we'd be prepared to sit down with North Korea if they would abandon their nuclear ambitions," Yonhap news agency quoted him as saying.

"We're in the process of discussions with our partners about what are the next steps associated with diplomacy."

After the United Nations Security Council censured its April 5 long-range rocket launch, the North announced it was quitting six-party nuclear disarmament talks with the United States, South Korea, China, Russia, and Japan.

It staged its second nuclear test on May 25, prompting the Council to adopt a resolution imposing tougher sanctions.

On Thursday the Council imposed a travel ban on five North Korean officials and asset freezes on five more entities involved in missile or nuclear programmes.

Campbell, who is making his first trip to the region since taking over from Christopher Hill last month, travels on to Thailand next week for the ASEAN Regional Forum on security issues.

Following a meeting with Deputy South Korean Foreign Minister Lee Yong-Joon, Campbell urged the North to return to the six-party talks, warning that the impoverished communist state would face more isolation and hardship.

"Truth of the matter is, down this path North Korea has chosen lie greater tensions, greater hardships for its people, more isolation and lack of engagement in international economy," he told journalists.

"I think it's unsustainable, and we believe that over time, North Korea will ultimately choose to re-engage," he said.

During an hour-long meeting with Lee, the two talked about the need for the two allies to stand together as they confront "very difficult challenges" on the Korean peninsula and put together a "game plan" to work together over the coming months.

The North has remained publicly defiant about the intensified sanctions.

It says the US inspired the UN to condemn its April rocket launch, which it described as a peaceful attempt to put an experimental satellite in orbit.

The US and other nations saw it as a disguised test of a Taepodong missile, which is theoretically capable of reaching Alaska.

On Saturday its official news agency reported comments by its ceremonial head of state Kim Yong-Nam at the Non-Aligned Movement summit in Egypt earlier this week.

Kim "asserted that if such acts of the US are allowed to go on, the DPRK (North Korea) would be totally deprived of the legitimate right to use space," the official agency said.

"The DPRK can never accept dialogue or negotiations minus the principle of respect for sovereignty and equal sovereignty," Kim Yong-Nam was quoted as saying.

"The prevailing situation compelled the DPRK government to take decisive steps to bolster up its nuclear deterrence."

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