UPDATE 2-Top U.S. diplomat says Moon-Abe meeting is 'encouraging sign' for relations

The United States was very encouraged by a recent meeting between the leaders of South Korea and Japan, a top U.S. diplomat said on Wednesday, as strained ties threatened to undercut three-way security cooperation on North Korea. U.S. Assistant Secretary of State David Stilwell arrived in Seoul on Tuesday as relations between South Korea and Japan, important U.S. allies, have plunged to their worst state in decades after South Korea's top court ordered Japanese firms to compensate wartime forced laborers last year.

But South Korean President Moon Jae-in and Japanese Prime Minister Shinzo Abe had an 11-minute conversation on the sidelines of an international conference in Bangkok on Monday, also attended by U.S. officials, the first time they had met in more than a year. "Very encouraged while we were there to note that President Moon and Prime minister Abe had the opportunity to talk," Stilwell told reporters after meetings with South Korean officials.

"That's an encouraging sign as we watch the relationship improve." His visit came as an intelligence-sharing pact between South Korea and Japan is set to expire this month.

South Korea decided not to renew the agreement, known as GSOMIA, amid the spiraling political and trade row, a decision that the United States has criticized. Stilwell met South Korean Foreign Minister Kang Kyung-Wha and Vice Foreign Minister Cho Sei-young but did not respond to a question on whether they discussed the situation.

South Korea's foreign ministry said Kang explained efforts to craft a "reasonable solution" to the feud with Japan. "The U.S. side said those efforts are encouraging and agreed that such efforts should continue going forward," the ministry said in a statement.

DECEMBER SUMMIT? Both sides were also expected to discuss ways to reinvigorate stalled denuclearisation talks between the United States and North Korea.

Envoys from the United States and North Korea met in Stockholm last month for the first time since U.S. President Donald Trump and North Korean leader Kim Jong Un agreed in June to reopen negotiations after a failed summit in Vietnam in February. But the meeting in Sweden broke down, with the North's envoy saying the U.S. side failed to show flexibility.

They could hold another round of talks as soon as mid-November as Kim set sights on a summit with Trump in December, a South Korean lawmaker said on Monday after being briefed by a spy agency. As Stilwell's meetings were underway, a group of activists rallied in front of the ministry building, deriding what they called a U.S. attempt to "squeeze" South Korea over the GSOMIA decision and defense cost-sharing talks.

James DeHart, the U.S. representative in the negotiations, designed to determine how costs are divided for the upkeep of 28,500 U.S. troops in South Korea, was also in Seoul. A survey by the government-affiliated Korea Institute for National Unification released on Wednesday showed that some 96% of South Koreans said South Korea should not pay more for the U.S. military presence, while 72% supported the decision to end the GSOMIA.

The lack of progress in the nuclear talks has also cast a pall over inter-Korean cooperation, stalled after a flurry of summits last year. Kim last week vowed to remove South Korea's "shabby", "capitalist" facilities from the North's Mount Kumgang resort, once a symbol of cross-border rapprochement.

The South's Unification Ministry, which is in charge of inter-Korean ties, said it had proposed sending a delegation of officials from the government and companies that built the facilities for an inspection after the North rejected its offer of talks.

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