(New with Karzai arrival, previous WASHINGTON)

By Caren Bohan

CAMP DAVID, Md., Aug 5 (Reuters) - The struggling, six-year effort to rebuild war-ravaged Afghanistan and defuse the threat from Taliban and al Qaeda militants hiding over the border in Pakistan will dominate talks this weekend between U.S. President George W. Bush and Afghan President Hamid Karzai.

The more immediate crisis of trying to free 21 Korean hostages seized by the Taliban last month will also be high on the agenda for the talks, which began on Sunday.

Two of the original 23 hostages have been murdered and South Korea is pressing the United States and Afghanistan to do all they can to negotiate a release of the surviving captives.

U.S. officials have described the two-day meeting at Camp David as a strategy session on Afghanistan, where violence has surged over the last 18 months to its worst level since the overthrow of the Taliban in 2001.

Karzai arrived on Sunday afternoon at the mountain-top presidential retreat, and was greeted by Bush and his wife, First Lady Laura Bush, along with a Marine honor guard.

On Monday, Bush and Karzai are to hold a news conference at 11:25 a.m. EDT (1525 GMT).

In an interview taped before he left Afghanistan, Karzai told CNN's Late Edition the effort to find al Qaeda leader Osama bin Laden, the mastermind of the Sept. 11 attacks on the United States, remained about where it was a few years ago.

"The information that we have in (the) Afghan system, we are not closer, we are not further away from it. We are where we were a few years ago," Karzai said.

Asked if he was open to concessions to try to free the Korean hostages, Karzai said: "We will not do anything that will encourage hostage-taking, that will encourage terrorism. But we will do everything else to have them released."

The beleaguered Karzai, the target of three assassination attempts, is considered a crucial U.S. ally. Well-spoken and genial, he has strong support in the U.S. Congress as well as within the Bush administration.

OPIUM TRADE FLOURISHING

But he has had difficulty building a robust central government in a country with a history of tribal rifts and where warlords wield strong power in many of the provinces.

Karzai is grappling with numerous challenges, including suicide bomb attacks by the Taliban, mounting deaths of civilians killed in the cross-fire of fighting between Western forces and militants, and a booming opium trade.

Afghanistan supplies around 92 percent of the world's opium, and the crop has become a source of cash for the Taliban and a corrupting influence in the government.

Lisa Curtis, South Asia expert at the Heritage Foundation, said one aim for Bush at the summit will be to reassure Karzai about the U.S. commitment to his country.

Bush's commitment to Afghanistan can be underscored by "some kind of initiative or talking about increases in the aid amounts," she said. The United States has allocated $10 billion for the Afghanistan effort this year and boosted troop levels.

Afghanistan's woes have helped to fuel criticism of Bush from those who say the Iraq war diverted the post-Sept. 11, 2001, focus away from combating the Taliban and al Qaeda.

A report from U.S. spy agencies in July found that bin Laden's al Qaeda militants and the Taliban were gaining strength and training new recruits in Pakistan's rugged Waziristan region near the Afghan border.

At a White House meeting last September with Bush and Pakistani President Pervez Musharraf, Karzai raised concerns about Musharraf's truce with tribal leaders in Waziristan. U.S. officials have acknowledged the truce was a failure. But Bush has remained supportive of Musharraf.

(Additional reporting by Paul Eckert and Rachelle Younglai)

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