(Adds North Korea proposal for talks)

By Jack Kim

SEOUL, Sept 26 (Reuters) - International talks on ending North Korea's nuclear arms ambitions could be heading for a breakdown after Pyongyang said it would restore a plutonium- making plant, South Korea's foreign minister said on Friday.

The International Atomic Energy Agency said on Wednesday that the North was expelling U.N. monitors from its Soviet-era nuclear plant and plans to start reactivating it next week, rolling back a disarmament-for-aid deal and putting pressure on Washington.

"We are at a difficult situation where we may be going back to square one," Yu Myung-hwan said at an academic seminar.

But, in an apparent softening of its stance toward the South, North Korea on Friday proposed holding inter-Korea defence talks in its first offer for direct bilateral dialogue since a new president took office in Seoul in February.

The South's Unification ministry said in a statement the North "has proposed holding working-level military talks on Sept. 30" and the South is considering the proposal.

An angry North Korea, used to a free flow of aid, had suspended talks after President Lee Myung-bak said his government would instead tie Seoul's handouts to progress Pyongyang makes in ending its nuclear arms programme.

Yu, who has just returned from a trip to the United States where he discussed North Korea with Washington officials, said Pyongyang might be trying to turn up the heat on the outgoing Bush administration and the next person in the White House.

"It is possible that the North's decision to go back on the disablement steps is a strategy associated with the U.S. presidential election," Yu said.

The Bush team, looking for a foreign policy success with a few months left in office, might offer last-ditch concessions. If not, Pyongyang will be in a stronger bargaining position when a new president takes office in January, analysts said.

Yu told reporters there were still U.N. and U.S. nuclear inspectors at Yongbyon, with analysts saying the North could want them there to watch it take its first serious steps towards re-starting Yongbyon.

PRODUCING PLUTONIUM

The disarmament deal might have broken down in part because North Korea thought a U.S. plan to verify Pyongyang's claims about plutonium production would give inspectors far too much access to the secretive state, the Washington Post reported on Friday. For a related story, click on [ID:nN26197624]

The U.S. plan would allow investigators to take photographs and make videos of any suspected nuclear site, remain on site as long as necessary, make repeated visits and collect and remove samples, according to a document obtained by the newspaper.

Energy-starved North Korea has received shipments of heavy fuel oil and other aid as a reward for progress it has previously made in the nuclear deal. But South Korea has indicated the aid could be terminated because of the North's backtracking.

North Korea has already received about half of the 1 million tonnes of heavy fuel oil, or aid of equivalent value, that started flowing its way once it froze Yongbyon and allowed the IAEA to place seals on the reactor complex.

Last November, North Korea started to disable the ageing Yongbyon plant that had produced weapons-grade plutonium.

The step was part of the disarmament-for-aid deal it reached with China, Japan, Russia, South Korea and the United States.

Experts have said most of the disablement steps that were aimed at taking about a year to reverse have been completed and North Korea, which tested a nuclear device in October 2006, cannot easily get back into the plutonium producing business. (Writing by Jon Herskovitz; Editing by Valerie Lee)

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