North Korea announced Monday it would set up an economic zone on two islands on the border with China, just days after leader Kim Jong-Il returned from a trip to study his neighbour's dramatic economic rise.

Pyongyang "decided to set up the Hwanggumphyong and Wihwa Islands Economic Zone in order to boost the DPRK-China friendship and expand and develop the external economic relations", the official Korean Central News Agency said.

The two islands in the estuary of the Yalu river which runs along the border have long been tapped as a joint economic development zone between North Korea and China, the South's Yonhap news agency said.

The brief KCNA dispatch said the zone would be under North Korean sovereignty.

The announcement comes shortly after Kim returned on May 27 from his third trip in just over a year to China, his country's sole major ally and economic lifeline.

Beijing has called for a Chinese-style opening-up of North Korea's crumbling state-directed economy.

Chinese Premier Wen Jiabao had said Kim was invited to study China's dramatic economic development in the hope he would use the knowledge to revive his own country's economy.

According to Chinese accounts of the visit, Kim told President Hu Jintao that the North "is currently focusing its efforts on economic development and we really need a stable environment for this".

The North's economy is beset by serious shortages of electricity and raw materials and it grapples with persistent serious food shortages. International sanctions imposed to curb its missile and nuclear programmes have discouraged foreign investment.