"The State Department said it badly wanted the North Koreans to withdraw their money from Banco Delta Asia (BDA), which was blacklisted by the Treasury Department in March, so negotiations with Pyongyang on ultimately scrapping all its nuclear programs can resume," the report said.

Any bank that would accept the transfer, however, would be doing business with BDA and could face potential US penalties, the report said.

"The Treasury has so far not been able to satisfy any third-country institution that it can safely handle the money, and diplomats said it might be easier to grant an exemption to an American bank," the report said.

In Tokyo, Japan's Kyodo News, citing anonymous sources in Washington, said that the US government was looking into the possibility of letting a US bank handle North Korean money as a "special case."

Macau's Banco Delta Asia would transfer the cash to a US bank which would in turn send it to a third country, Kyodo News said.

North Korea has refused to comply with February's breakthrough six-nation nuclear deal until it receives 25 million dollars stuck in Macau.

The United States said the funds were the suspected proceeds of money-laundering and counterfeiting. In an attempt to move the nuclear pact forward, Washington announced in March that the funds had been unfrozen.

But foreign banks are unwilling to handle the suspicious cash for fear of sullying their own reputations.

North Korea cited the dispute as a reason to boycott six-nation talks for more than a year, during which it tested an atomic bomb.

It signed a disarmament-for-aid agreement on February 13 but refused to carry out its commitments to shut down the Yongbyon nuclear reactor and allow in UN inspectors by April 14, saying it was waiting to see the money.

earlier related report
NKorea remains committed to nuclear disarmament: official
Seoul (AFP) May 10 - North Korea's number two leader said Thursday that his country remains committed to nuclear disarmament despite a prolonged banking dispute that has impeded a deal to end its nuclear programme.

Kim Yong-Nam blamed Washington for the delayed release of North Korean funds held at a Macau bank, according to Yonhap news agency.

"We are taking steps as agreed upon, but the United States is acting in a two-faced way, causing the delay," he said.

Kim's comment came at talks with visiting former South Korean provincial governor Sohn Hak-Kyu in Pyongyang, Yonhap said.

North Korea has refused to start shutting down its Yongbyon reactor, as pledged in a February 13 multinational agreement, until it receives 25 million dollars which had been frozen in the Macau bank following a US blacklisting.

In an attempt to move the nuclear pact forward, Washington said in March that the funds had been unfrozen. But foreign banks are unwilling to handle the cash as it is seen as tainted.

"The February 13 agreement was made to be implemented, not just adopted as a document," Kim reportedly said.

Denuclearisation was founder of the nation Kim Il-Sung's dying wish, he said, adding the North's nuclear programme was created as a self-defence measure against Washington's "hostile" policy.

Sohn, an independent presidential hopeful, was scheduled to tour industrial facilities and exchange views on inter-Korean economic cooperation and the nuclear dispute during a four-day trip to North Korea that ends on Saturday, Yonhap said.

The former governor, who defected from South Korea's conservative opposition Grand National Party in March, remains a distant third in polls.

earlier related report
Japan threatens new sanctions against NKorea
Tokyo (AFP) May 10 - Japan threatened North Korea with fresh sanctions unless its shuts a nuclear reactor amid reports Thursday the US may allow an American bank to handle blacklisted money to end the stalemate.

In the latest diplomacy to kickstart the troubled February 13 aid-for-disarmament deal, Japan and South Korea on Thursday issued a joint call for the communist state to live up to its promises.

North Korea has refused to comply with its pledges to shut down a nuclear reactor by April 14 due to a long-running dispute over 25 million dollars stuck at a bank account in the Chinese territory of Macau.

Japan, which has tense relations with North Korea, threatened new sanctions unless Pyongyang meets its commitments soon.

"We will soon, maybe within a week or so, talk with the United States about how we have had enough," Foreign Minister Taro Aso told a lower house panel Wednesday.

Prime Minister Shinzo Abe said that Japan "won't stay patient forever."

"If North Korea does not carry out what it had promised, we will have to think about a variety of options," Abe told reporters late Wednesday.

North Korea's number two leader said Thursday his country remained committed to nuclear disarmament despite the dispute.

Kim Yong-Nam blamed Washington for the delayed release of the funds, according to Yonhap news agency. "We are taking steps as agreed upon, but the United States is acting in a two-faced way, causing the delay," he said.

Kim's comment came at talks with visiting former South Korean provincial governor Sohn Hak-Kyu in Pyongyang, Yonhap said.

Japan has already imposed sweeping sanctions against North Korea, including a ban on all imports. Advocates of stronger action have suggested measures such as banning exports and blacklisting ships that travel to the communist state.

But in a potential move to resolve the crisis, Japan's Kyodo News and The Washington Times said the US was considering letting an American bank handle the money at Macau's Banco Delta Asia.

Such a move would go against Washington's usual insistence on isolating states or groups it considers terrorists from the banking system.

Kyodo News, citing anonymous sources in Washington, said the US government hoped to resolve the row within a few days.

If the deal is approved, the Macau bank would transfer the cash to a US bank which would in turn send it to a third country, Kyodo News said.

Asked whether the United States would make an exception to let a US bank handle the money, State Department spokesman Sean McCormack said it was up to the Treasury Department.

"It's a heck of a lot more complicated than anybody would have ever thought," McCormack said of unfreezing the money.

"Everybody wants to see this transaction completed, over and done with, so that we can move on."

The US froze the funds in 2005, saying they were proceeds of money laundering and counterfeiting. In an attempt to move the nuclear pact forward, Washington announced in March that the funds had been unfrozen.

But foreign banks are unwilling to handle the suspicious cash for fear of sullying their own reputations.

North Korea cited the dispute as a reason to boycott six-nation talks for more than a year, during which it tested an atomic bomb.

The six nations in the talks are the two Koreas and North Korea's main ally China, along with Japan, Russia and the United States.

US President George W. Bush and his Chinese counterpart Hu Jintao agreed in a telephone call Wednesday "on the need for North Korea to move forward in implementing its obligations under the February 13 agreement," White House spokesman Gordon Johndroe said.

Japan and South Korea also said after security talks Thursday in Tokyo that North Korea "needs to take initial measures as soon as possible."

Japan has championed a tough line against North Korea, in part due to an emotionally charged row over Pyongyang's past abductions of Japanese. South Korea has supported reconciliation with the communist North.

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