(All new with Hill testimony before Congress)

By Carol Giacomo and Arshad Mohammed

WASHINGTON, Feb 28 (Reuters) - The United States, taking a step Pyongyang has long desired, will begin normalization talks with North Korea in New York next week but the State Department on Wednesday played down expectations.

Chief U.S. negotiator Chris Hill, who will hold discussions on Monday and Tuesday with North Korean envoy Kim Kae-gwan, said the meetings would mark the beginning of what is likely to be a lengthy process called for under a Feb. 13 nuclear agreement.

Noting "real differences" on many bilateral issues like human rights that go beyond denuclearization, Hill told a congressional committee such concerns must be addressed as the normalization process proceeds.

He also defended a committment to discuss taking North Korea off the U.S. "terrorism" list, saying it was in America's interest to move countries away from such behavior.

The United States and North Korea have not had diplomatic relations since the 1950-53 Korean War.

At the State Department, spokesman Sean McCormack added: "Don't look at it as a meeting that is going to produce immediate results. Nobody is going to come out the front door and wave a piece of paper with some agreement on it."

Kim was expected to arrive in San Francisco on Thursday and travel to New York on Friday.

The announcement of dates for the normalization talks reflected quickening steps to implement the Feb. 13 agreement in which North Korea agreed to move toward nuclear disarmament in exchange for $300 million in aid and prospects for other diplomatic and security benefits.

Testifying before the U.S. House of Representatives Foreign Affairs Committee, Hill said he recognized lawmakers' concerns over whether Pyongyang would honor its commitments.

CHINA AS GUARANTOR

But he said the deal addresses that problem by mandating actions on a tight deadline and by including China -- the North's main benefactor -- as a guarantor.

Hill said the agreement would not prevent the administration from taking action if it found new evidence of North Korean counterfeiting and money laundering activity.

Before the Feb. 13 deal, Pyongyang had refused for more than a year to participate in six-country negotiations on its nuclear programs in protest over the U.S. Treasury Department's designation of Macau's Banco Delta Asia as an "institution of primary money laundering concern."

Treasury said the bank held funds connected to Pyongyang's counterfeiting operations and the move led Macanese authorities to freeze $24 million in North Korean accounts.

With an announcement expected soon that could resolve the case by unfreezing half of the North Korean funds, Republican Rep. Edward Royce of California said he feared the admnistration had decided to de-emphasize Pyongyang's "economic warfare" on the U.S. national currency.

But Hill insisted "we have not and will not trade progress on denuclearization by turning a blind eye to some of these other activities."

Hill, discussing U.S. concerns about North Korea's capability to launch missiles that could hit Japan, reaffirmed that "we will respond" if the U.S. treaty ally is attacked.

The deal, reached four months after Pyongyang stunned the world with its first nuclear test, requires the secretive communist state to disable the reactor at the heart of its nuclear ambitions and to allow international inspections.

In an initial 60-day implementation stage, the North is supposed to shut down and seal its main plutonium-producing nuclear complex at Yongbyon in return for 50,000 tonnes of heavy fuel oil.

The deal also calls for creation of five working groups -- including the one on normalizing U.S.-North Korean relations -- to meet within 30 days.

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