SEOUL, Dec 30 (Reuters) - South Korea has been drawing up plans to buy the release of more than 1,000 of its citizens held in North Korea and repair strained ties through the massive aid for its impoverished neighbour, local media reported on Tuesday.

The South wants to entice the North into freeing South Korean civilians it has abducted and prisoners it has held since the end of the 1950-53 Korean War through cash, materials and food, the daily Chosun Ilbo reported government officials as saying.

North Korea has cut almost all ties with the South in anger at the policies of President Lee Myung-bak, who took office in February and ended what once had been a free flow of unconditional aid to his prickly neighbour.

The Communist North and capitalist South are still technically at war, never having signed a formal peace treaty to end hostilities in 1953.

Analysts said the North's already staggering economy was dealt a blow by the loss of aid from the South and will be hit hard by a cut in aid to punish it for not living up to the terms of an international nuclear disarmament deal.

South Korea has repeatedly offered cash to the North to return its citizens but Pyongyang has not accepted, Yonhap news agency quoted officials as saying.

The South's Unification would not confirm the reports but said the return of its citizens from the North is one of its top policy concerns.

Yonhap said last week that the North, which denies holding South Koreans against their will, had approached Seoul about working out a plan to exchange South Koreans for cash and economic incentives.

Japan has hit North Korea with sanctions and suspended aid as it has called on Pyongyang to settle problems caused by its agents abducting Japanese nationals decades ago and holding them in the reclusive communist state.

North Korea, with an economy estimated at about $20 billion a year, has lost out on at least $1 billion in aid the South had been supplying each year due to the strain in ties.

About two weeks ago, the United States called for a suspension of heavy fuel oil aid to the energy-starved North because at six-way nuclear talks this month Pyongyang did not agree to a system to check claims it made about its atomic arms programme. (Reporting by Jon Herskovitz and Kim Junghyun; Editing by Nick Macfie)

AlertNet news is provided by