The North Korean warning came as a maritime skirmish heightened tensions on the peninsula, just hours after Pyongyang announced it was withdrawing athletes from the World Student Games starting in South Korea this week.

US and South Korean military authorities also launched 12-day joint war games as scheduled Monday, despite Pyongyang's protests against the massive military maneuvers.

Pyongyang has denounced US-South Korean military drills as part of Washington's hostile policy which it reiterated Monday should be dropped to settle the 10-month-old crisis over its nuclear development.

"If the US does not express its will to make a switchover in its policy towards the DPRK (North Korea), the DPRK will have no option but to declare that it can not dismantle its nuclear deterrent force at the talks," the state-run Korean Central News Agency (KCNA) said.

North Korea is to meet the United States, Japan, China, Russia and South Korea in Beijing on August 27-29 for talks aimed at resolving the crisis, which started in October.

KCNA said Washington should prove it had changed its policy towards North Korea by agreeing to a non-aggression pact and diplomatic normalization, and pledging not to hinder Pyongyang's international trade.

The North's foreign ministry last week said Pyongyang would make these demands at the talks, which were set after weeks of intense Chinese-led diplomacy.

The United States has already rejected a non-aggression pact although Secretary of State Colin Powell has suggested there may be a way for the US Congress to take note of a less formal arrangement.

The nuclear crisis erupted when the United States accused Pyongyang of reneging on a 1994 bilateral nuclear accord by setting up a clandestine program based on enriched uranium.

North Korea, which says it needs its own nuclear deterrence against the United States, expelled UN nuclear inspectors and withdrew from the treaty. It has since claimed to have reprocessed 8,000 spent fuel rods for weapons-grade plutonium at its nuclear plant at Yongbyon.

Australian Prime Minister John Howard on Monday described North Korea's nuclear threat as one of the most serious issues confronting the world and prodded China to keep exerting pressure on the hermit regime.

"The North Korean nuclear threat is about as real and serious a threat as we could have anywhere in either the region or the world. That's the sobering message," he said during a visit to Beijing.

Nations due to meet next week have been finalizing their positions.

Russian Deputy Foreign Minister Sergei Kislyaka left Moscow for Washington on Monday to hold consultations ahead of the talks, and Japan announced Foreign Minister Yoriko Kawaguchi would visit South Korea from Friday on a similar mission.

In an illustration of the volatile security situation on the peninsula, South Korean warships fired five 40-millimeter gun shots Monday to drive back a North Korean vessel violating territorial waters in the Yellow Sea, military authorities said.

And Pyongyang said it had cancelled its participation in the World Student Games due to open in the southern city of Daegu on Thursday to protest anti-North Korean demonstrations by right-wing groups in South Korea last week.

US and South Korean troops began the joint war games Monday in the face of objections from North Korea, which branded them a rehearsal for a pre-emptive strike on the communist country.

The annual exercise, focusing on computerized war simulations with North Korea, involves 14,500 US troops based in and out of South Korea, US military authorities here said.

The United States stations 37,000 troops in South Korea according to a mutual defense treaty signed after the 1950-1953 Korean War.

The two Koreas remain technically at war since the conflict which ended in an armistice, rather than a peace treaty.

The Washington Post reported Monday the United States and Australia plan to conduct joint naval exercises off northeastern Australia in September to seize arms and other banned goods shipped into and out of North Korea.

The drills were meant "to send a sharp signal to North Korea to dismantle its nuclear weapons program," it quoted US government officials and Asian diplomats as saying.

WAR.WIRE