(Adds comment from ministry, details)

By Jon Herskovitz

SEOUL, Oct 16 (Reuters) - Destitute North Korea on Thursday threatened to end all relations with South Korea, a major source of aid and cash, in anger at the hardline policies of its conservative president.

The move comes days after North Korea pledged to resume taking apart a nuclear plant that makes bomb-grade plutonium and return to a disarmament deal after the United States took the North off its terrorism blacklist and removed some trade sanctions.

"If the group of traitors keeps to the road of reckless confrontation with the DPRK (North Korea), defaming its dignity despite its repeated warnings, this will compel it to make a crucial decision including the total freeze of the North-South relations," the North's communist party newspaper said in a commentary, referring to South Korean President Lee Myung-bak.

The state media regularly hurls insults at Lee but this latest commentary was similar in form to a warning issued in April that was followed by the North cutting off direct dialogue and expelling South Korean officials from a joint factory park just north of the border.

The North has been angry at Lee since he took office in February and pledged to cut off what once had been largely unconditional aid. Analysts said the North, which often employs pressure tactics, may be moving now because it feels it has gained leverage through the nuclear agreement.

Under the compromise in a nuclear deal it has with China, Japan, Russia, South Korea and the United States, North Korea pledged to allow in international inspectors to check claims it made about its nuclear programme after Washington removes it from a terrorism blacklist.

This gives the ostracised North more chance to tap into international finance and trade and could help it raise up its crippled industrial base and possibly make it easier for overseas investors to tap into its mineral wealth.

North Korea, with an economy that is less than 3 percent of the South's, has seen aid from its rich neighbour cut drastically since Lee came to power promising huge investment and aid if the North gave up trying to create a nuclear arsenal.

But Pyongyang rejected his overtures, a move analysts said reflected its autocratic government's fear that a large influx of South Korean businessmen would threaten its grip on one of the world's most reclusive societies. [ID:nSEO26291]

"This is a signal, or even a threat, to the South Korean government to change the direction of its policy," said Koh Yu-hwan, a Dongguk University professor of North Korea studies.

LESS DEPENDENT ON SOUTH

Analysts have said that Pyongyang may be hoping its latest nuclear compromise, by opening the door to doing business internationally, will make it less dependent on South Korea.

A South Korean Unification Ministry spokesman played down the commentary, calling it "an indirect expression of the North's various grievances."

A sharp increase in tension between the two Koreas could cause problems for the South by increasing its perceived political risk and making it more expensive for its companies to raise funds internationally at a time when the economy is already wobbling from the impact of the global financial turmoil.

The Lee government has asked North Korea to hold bilateral talks and resume humanitarian projects such as reunions for the tens of thousands of families separated after the 1950-1953 Korean War, which has never officially ended.

The nuclear compromise and the threats to Seoul come as questions have been raised over how decisions are now being made in the North after U.S. and South Korean officials said leader Kim Jong-il may have suffered a stroke in August. (For related factbox see KOREA-NORTH) (Additional reporting by Jack Kim and Kim Junghyun; Editing by Jonathan Thatcher and Valerie Lee)

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