North Korea's chief delegate Chu Dong-Chan stormed out of the room Thursday in protest at the South's call but the talks later went on as scheduled, according to media pool reports from Pyongyang.

The impoverished North, facing severe food shortages, wants an unconditional commitment from the South to provide an annual 400,000 tons of rice aid and says political issues should not be raised at the economic talks.

But Seoul may link rice to progress on denuclearisation after the North missed an April 14 deadline to start the process.

"We stressed the potential negative impact of the North's failure to carry out the agreement. I think we have to decide on rice aid given the direction of the talks," Kim Joong-Tae, spokesman for the South's delegation, said Thursday night.

"We will do our best to hold sincere talks with the North for the remainder of the meeting."

At talks Friday the two sides exchanged drafts of a joint statement to be issued at the end of the four-day meeting on Saturday, according to the reports.

"Basically, every topic worth discussing was dealt with," said the spokesman, when asked whether rice was addressed.

Seoul suspended its regular annual shipment of 400,000 tons of rice after the North's missile tests last July. Relations soured further after its October nuclear test but improved when the North returned to six-nation nuclear disarmament talks.

Under the first phase of a February six-nation nuclear disarmament deal, the North was supposed by last Saturday to have made moves to shut down and seal its Yongbyon reactor, which produces the raw material for plutonium to make bombs.

It missed the deadline because of delays in freeing up 25 million dollars of North Korean funds that had been frozen in a Macau bank at US instigation, on suspicion of money-laundering and counterfeiting.

The United States said the money was made available last week, but there has been no word on when or how the cash will be withdrawn.

At the talks in Pyongyang North Korea proposed setting up a branch of a North Korean bank at a joint industrial zone in its border city of Kaesong to ease financial settlements.

"The bank issue was not raised before. (South Korea's) Woori Bank has a branch at the industrial complex, but the two Koreas have no agreement to establish a North Korean bank to trade with the Woori Bank branch," Kim told reporters.

Currently, some 13,000 workers are employed by 22 South Korean firms at Kaesong, producing labour-intensive products such as garments and kitchenware.

South Korea is also pushing for test runs on two cross-border railway lines in May.

In his speech Thursday the chief North Korean delegate suggested that the two Koreas promote joint projects to exploit natural resources in Russia's far east, and build joint chemical plants in the North's free economic zone.