Seoul  - North Korea has dropped its demands for a fourfold wage increase for its workers at an industrial park jointly run with South Korea, the government in Seoul said Friday.

The concession was made after six South Koreans died this week in a flash flood caused when North Korea made an unannounced release of water from a dam. It caused anger in the South after August saw a cautious warming of relations between the two neighbours.

Pyongyang notified Seoul Thursday that it would agree to a 5-per-cent pay increase for the 40,000 North Koreans employed by South Korean companies at the park in Kaesong, just north of the inter-Korean border, the Unification Ministry in Seoul said.

In June, as tensions were rising between the Stalinist North and Asia's fourth-largest economy, Pyongyang had demanded an increase in the monthly wages of 70 to 80 dollars to 300 dollars as well as a rise in the rent for the Kaesong complex to 500 million dollars from the 16 million dollars the two sides had agreed upon in 2004.

The demands had endangered the further operation of the South Korean-financed park, but North Korea eventually softened its stance and last month agreed to "normalize" commuter traffic over the border to Kaesong.

North Korea said Thursday that it wanted to reach a wage agreement as soon as possible, a Unification Ministry spokeswoman said in Seoul.

"Our management office, after consultations with businesses operating there, is going to sign with the North soon," Lee Jong Joo said.

What was to be done with the North's demands for a rent increase was unclear.

Relations between North and South have run hot and cold recently. Ties deteriorated substantially with the February 2008 inauguration of conservative South Korean President Lee Myung Bak, who took a harder line towards the North than his liberal predecessors.

Tensions ramped up this year as the North conducted a nuclear test in May, set off a series of missiles and withdrew from talks on its nuclear programme.

But Pyongyang made a series of conciliatory gestures last month, clearing the way for the resumption of reunions of families separated by the 1950-53 Korean War and relaxing restrictions on traffic over the heavily militarized Korean border.

It also announced it would allow South Korean tourists to visit the country again and sent its first envoys to Seoul to meet with Lee Myung Bak since Lee took office.