By Jack Kim

SEOUL, Oct 2 (Reuters) - North and South Korea began military talks on Thursday in their first discussions since Pyongyang cut off dialogue this year in anger at the hard-nosed policies of the South's new conservative president.

The talks, proposed by the impoverished North and seen by analysts as a possible olive branch, came as a U.S. nuclear envoy visited North Korea trying to rescue a faltering disarmament deal and stop the communist state restarting a plant that makes weapons-grade plutonium.

Colonels from the two Koreas met at the Panmunjom peace village, straddling the heavily armed border that has divided them for more than half a century, to discuss ways to reduce tensions, Seoul's Defence Ministry said.

"We are holding talks at a time when North-South ties are at a very grave state," North Korean delegate Pak Rim-su said, according to a pool report.

In a surprise move last week, the North proposed the meeting for Tuesday. It later accepted the South's counterproposal for Thursday, the ministry official said.

Ties between the two states chilled after President Lee Myung-bak took office vowing to end what once had been a free flow of aid to the impoverished North and instead tie Seoul's handouts to progress Pyongyang makes in ending its nuclear arms programme.

In response an angry North Korea called Lee a traitor to the nation, cut off dialogue with one of its biggest aid donors and threatened to reduce Seoul to ashes.

The latest talks come almost exactly a year after a rare summit between the leaders of the two Koreas at a time when the South was still under a left-leaning government. Its policies of accommodating Pyongyang have largely been dropped since Lee took office.

Tensions were aggravated in July when a North Korean soldier shot dead a South Korean housewife when she was sightseeing at a mountain resort just north of the border.

Fifty-five years after the truce which halted the Korean War, North and South remain locked in tense confrontation.

Military talks in previous rounds focused on cutting tension along the Demilitarised Zone that acts as a buffer between the two states, and in disputed waters where naval skirmishes in the past killed dozens of sailors on both sides. The last round was in January. (Reporting by Jack Kim, writing by Jon Herskovitz, editing by Jonathan Thatcher and Roger Crabb)

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