SEOUL (Reuters) - North Korea said on Monday it had agreed to reopen the border to South Korea its neighbor and allow tourism and family reunions to start again.

North Korean leader Kim Jong-il (R) poses with South Korea's Hyundai Group chairwoman Hyun Jeong-eun during their meeting at an undisclosed location in North Korea August 16, 2009, in this picture released by the north's official news agency KCNA. REUTERS/KCNA

But in a reminder that tensions still run high on the peninsula, North Korea’s KCNA news agency immediately followed the report with one warning of a “merciless and prompt annihilating strike,” including nuclear weapons, if upcoming U.S. and South Korean military drills commit even the slightest infringement on its sovereignty.

The agreement to ease restrictions on the border follows a meeting between the reclusive state’s leader Kim Jong-il and the head of the South Korean Hyundai Group who had gone to Pyongyang to seek the release of a detained worker.

The visit followed hot on the heels of one earlier in the month by former U.S. President Bill Clinton, who also met Kim, to win the release of two jailed American journalists.

The visits come after months of military grandstanding by the North, including a second nuclear test, that has led to tightened U.N. economic sanctions which some analysts say may be starting to hurt what is already an almost broken economy.

North Korea has portrayed both visits as paying tribute to leader Kim, 67, whose health is the subject of speculation. He is believed to be trying to ensure his youngest son becomes the third generation in the family to head the destitute communist dynasty, its coffers drained by heavy military spending, poor economic management and years of U.N. sanctions.

KCNA said Kim on Friday “granted a long audience to and had a cordial talk with Hyon Jong Un, chairperson of the Hyundai Group, and her party on a visit to Pyongyang, and complied with all her requests.”

The giant Hyundai Group runs tourism to the North and operates the Kaesong industrial park just across the border and a lucrative source of income for Pyongyang’s leadership.

COLD WAR FRONTIER

Tours across the Cold War’s last frontier have ground to a halt and the industrial park itself has looked under threat as relations between the two, technically at war for more than half a century, have worsened.

The freeze was triggered after South Korea’s conservative President Lee Myung-bak took office 18 months ago ending a free flow of aid unless his neighbor gave up its nuclear weapons program -- something the North says it cannot do while U.S. troops remain in the South.

Under the latest agreement, land passage across their heavily armed border which was all but blocked late last year will be resumed, allowing the normal traffic to the Kaesong factory park.

It will also allow the restart of tourism to the scenic Mt Kumgang resort, halted a year ago after a North Korean soldier shot dead a tourist from the South who had wandered into a military area.

And Hyundai will launch long-planned tours to the Mt Paektu, a sacred mountain in Korea and, according to official North Korean history, where Kim Jong-il was born. He is widely thought to have in fact been born in the Soviet Union where his father was being trained during World War Two.

North Korea will also allow the resumption in October of the emotionally charged reunion of families separated by the 1950-53 Korean War.

There was no word on whether Hyundai, as part of the latest deal, had buckled to recent demands by North Korea for hefty increases in payments for operating the Kaesong industrial park which offers cheap labor to South Korean companies.

The agreement will reopen crucial sources of income for the North as it grapples with the impact of U.N. sanctions, aimed at cutting off its weapons trade that has long been an important source of income.

Ambassador Philip Goldberg, the U.S. coordinator for implementation of the U.N. resolutions, is expected to travel to Asia this week to strengthen the measures.

Last week, he said efforts to inspect North Korean vessels for illegal weapons and curb financial transactions by Pyongyang entities suspected of proliferation were winning wide backing.