SEOUL (Reuters) - Communist North Korea says it wants nuclear weapons so it can cut its huge conventional forces and divert funds into an economy foreign analysts say is close to collapse.

North Korea's most explicit public acknowledgement to date that it was seeking to build nuclear weapons also marked the first time Pyongyang had linked its atomic programme to cutting its conventional military and saving money.

In a separate development, a senior U.S. official said he believed the North would soon agree to five-way talks on its nuclear ambitions, saying Pyongyang's long opposition to the format appeared to be weakening.

North Korea has one of the largest armed forces in the world with 1.1 million troops, many of them forward-deployed near the Demilitarised Zone that bisects the Korean peninsula.

In a Korean-language commentary, the North's official KCNA news agency said if the United States did not give up what it described as its hostile policy Pyongyang would have no choice but to have a nuclear deterrent.

"We are not trying to possess a nuclear deterrent in order to blackmail others but we are trying to reduce conventional weapons and divert our human and monetary resources to economic development and improve the living standards of the people," KCNA said. A commentary on KCNA clearly has high-level approval.

The United States' Central Intelligence Agency has said the North processed enough plutonium for one or two atomic bombs during a nuclear programme that was frozen in 1994. Late last year, the North restarted a research reactor capable of producing plutonium.

At three-way talks including China, North Korea told the United States in April it already had nuclear weapons.

The KCNA report was issued as South Korean Defence Minister Cho Young-kil told parliament he planned to raise 2004 military spending to prepare for a greater defence burden falling on Seoul under a sweeping overhaul of U.S. forces in the South.

ECONOMY ON THE EDGE

Yu Suk-ryul, a professor at the Institute of Foreign Affairs and National Security in Seoul, said the KCNA commentary seemed intended to play up the North's economic difficulties and underscore its desire for bilateral talks with the United States about its nuclear ambitions.

"Because North Korea admitted officially it possesses nuclear weapons, now they can give reasons based on that," he said. Many economists say the North's economy is close to collapse despite -- or even because of -- piecemeal reforms. Many people are malnourished, aid groups say.

There was no immediate reaction from Washington, Seoul or Tokyo, but the United States was unlikely to welcome linkage between nuclear and conventional weapons and cash. All three countries have offered aid if the North drops its nuclear plans.

The administration of U.S. President George W. Bush, who has branded North Korea part of an axis of evil with Iran and pre-war Iraq, initially wanted talks with Pyongyang to include conventional forces and weaponry -- not least the thousands of artillery pieces along the DMZ, within easy range of the South's capital Seoul.

But Washington later dropped that precondition. The main focus now is on how to get North Korea to ditch its nuclear programme.

The nuclear dispute erupted last October when the United States said Pyongyang had admitted to having a covert programme.

In Tokyo, U.S. Deputy Secretary of State Richard Armitage was quoted by Japan's Kyodo news agency as saying five-country talks on the North's its nuclear ambitions could well take place within a month or in two at the latest.

He added the United States, South Korea and Japan would call for multilateral talks at a trilateral meeting in Hawaii later this week and that China would convey this stance to North Korea.

South Korean President Roh Moo-hyun wound up a four-day visit to Japan during which he and Japanese Prime Minister Junichiro Koizumi confirmed they would seek a peaceful solution to the nuclear crisis but differed on how to achieve that.

Roh underscored the need for dialogue. Koizumi has spoken of a tougher response if Pyongyang escalated the situation.

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