YEONPYEONG, South Korea (Reuters) - North Korea stepped back from confrontation over “reckless” military drills by the South on Monday and reportedly issued a new offer on nuclear inspections, drawing a cautious response from Seoul and Washington.

People watch a news report featuring old video footage of a North Korean firing drill, at a railroad station in central Seoul in this December 20, 2010 file photo. REUTERS/Truth Leem

Air-raid bunkers on the South Korean island of Yeonpyeong shook during South Korea’s live-fire artillery exercise, which went on for more than 90 minutes.

But the North Korean guns that had shelled the island after a similar drill last month stayed silent, bringing a measure of relief in a crisis that raised fears of war along one of the world’s most heavily fortified frontiers.

“The revolutionary armed forces of the DPRK did not feel any need to retaliate against every despicable military provocation,” the official KCNA news agency said, quoting a communique from the North’s Korean People’s Army Supreme Command that called the drills a “childish play with fire.”

The U.N. Security Council remained deadlocked in its efforts to ease tensions on the Korean peninsula, but North Korea’s refraining from retaliation and the nuclear offer reportedly made to U.S. trouble-shooter Bill Richardson offered some breathing space.

Richardson, speaking to CNN from Pyongyang, said he sensed a greater flexibility among North Korean officials.

“Their tone was more positive, as if they realized they’d gone into the precipice with their very negative actions,” said Richardson, who has had extensive past contacts with North Korea.

“They seemed to realize that they had maybe gone too far and now was a time to reach out,” Richardson said, according to a transcript released by CNN.

But others remained worried.

“The situation is very tense,” Russian Foreign Minister Sergei Lavrov said in Moscow. “There can be no optimism in this situation.”

The United States said North Korea’s decision not to retaliate simply showed it was behaving “the way countries are supposed to act.” It reacted cautiously to word of the nuclear offer, saying it would wait for concrete evidence of North Korea’s intentions.

“We’ve seen a string of broken promises by North Korea going back many, many years,” State Department spokesman P.J. Crowley said. “We’ll be guided by what North Korea does, not by what North Korea says it might do under certain circumstances.”

South Korean financial markets took the day’s events in their stride, recovering from early falls, but international investors remained concerned, with the cost of insuring South Korean sovereign debt for five years rising 10 percent.

The mercurial North had threatened it would strike back if its neighbor went ahead with the live-fire exercise.

On November 23, North Korean artillery shelled Yeonpyeong, close to the disputed maritime border off the west coast of the Korean peninsula, and killed four people in the worst attack on South Korean territory since the Korean war ended in 1953.

“It’s a perfectly natural thing for a sovereign nation and a divided country to conduct military exercises to defend its territory in the face of military conflict,” South Korean President Lee Myung-bak said in a statement.

Monday’s artillery exercise came hours after a U.N. Security Council meeting on the crisis ended in an impasse, with Russia and China resisting an explicit condemnation of North Korea for last month’s attack.

Another Security Council meeting planned for Monday was scrapped as diplomats assessed their positions.

POTENTIAL BREAKTHROUGH

But amid the gloom, New Mexico Governor Richardson, visiting Pyongyang to try to ease tensions, won agreement from North Korea to allow U.N. nuclear inspectors to return, according to CNN, which has a team traveling with him.

Pyongyang “agreed to allow International Atomic Energy Agency personnel to return to a nuclear facility in the country and agreed to negotiate the sale of 12,000 ... fuel rods and ship them to an outside country, presumably to South Korea,” CNN said, quoting correspondent Wolf Blitzer in Pyongyang.

Richardson said the offer might pave the way for the resumption of the so-called “6-party” talks on nuclear disarmament which also involve the United States, Russia, Japan, China and South Korea -- although Washington, Seoul and Tokyo have been cool to this idea.

“Maybe now is the time for the six-party countries to reach out to North Korea and say, ‘OK, let’s get down to business,’” he said on CNN’s “The Situation Room” show.

South Korea’s Foreign Ministry said it could not confirm any agreement and therefore could not evaluate it. The State Department sounded skeptical, underscoring that Richardson was on a private trip and had not formally briefed U.S. officials on what occurred.

“If North Korea wants to re-engage with the IAEA, wants to reintroduce inspectors into its facilities, that certainly would be a positive step,” Crowley said. “The key is following through and implementing that decision.”

Richardson was visiting in an unofficial capacity, the traditional means of communication between the two sides, and it was unclear whether the reported agreement meant real progress, particularly given Pyongyang’s poor record of honoring deals.

North Korea conducted nuclear tests in 2006 and 2009. It expelled inspectors in April 2009 after ripping up a previous disarmament-for-aid agreement. Last month Pyongyang unveiled major technical progress in uranium enrichment.

“Pyongyang is still using the same playbook: pursue provocative behavior, threaten the international community and then come up with some conciliatory gesture,” said Nicholas Szechenyi, a senior fellow at the Center for Strategic and International Studies.

Bruce Klingner, a senior research fellow at the Heritage Foundation, said North Korea’s reported advances with uranium could make visits to its existing Yongbyon nuclear facility less informative about the true state of its nuclear program.

“Returning IAEA inspectors to only Yongbyon really is a case of inspecting the barn after the horses have left,” he said.

NERVOUS MARKETS

Tension ahead of the military drills hit Korean markets when they opened Monday, but shares recouped most of their losses to close down just 0.3 percent, while the won ended local trade higher against the dollar.

Both sides have said they will use force to defend what they say is their territory off the west coast, raising fears the standoff could quickly spiral out of control.

Diplomats at the U.N. Security Council said plans for another session on Korean tensions on Monday had been scrapped with China’s envoys still awaiting word from Beijing.

Russia had called Sunday’s emergency Security Council meeting to try to prevent an escalation, but major powers failed to agree on a draft statement because of differences over whether to lay the blame on Pyongyang.