North Korea may carry out another atomic test next year to bolster the status of leader-in-waiting Kim Jong-Un, a Seoul state think-tank said Friday, a day after the North threatened a nuclear attack.

Tensions remain high on the peninsula a month after the North bombarded a South Korean border island and killed four people including civilians.

The North may stage a third test "to demonstrate Kim Jong-Un's military prowess, to improve plutonium-based nuclear weapons and ratchet up military tensions", the Institute of Foreign Affairs and National Security said.

A new test is needed to improve its plutonium-based bombs using data from the second test in May 2009, the institute, which is affiliated to the foreign ministry, said in a report.

The North has been working for decades to build plutonium-based weapons and last month also disclosed a new uranium enrichment complex -- a potential new way to make bombs.

The report said the North is likely to build up its atomic arsenal next year and might test a uranium-based weapon "to maximise the shock to the outside world".

While six-party nuclear disarmament talks may well resume next year, chances of any progress are slim, it said.

The North is thought to have enough plutonium for maybe six to eight weapons but it is not known whether it can fit them to missile warheads. Nevertheless, it frequently raises the prospect of nuclear war.

On Thursday the North vowed readiness for a "sacred war" using its nuclear weapons.

"The revolutionary armed forces... are getting fully prepared to launch a sacred war of justice of Korean style based on the nuclear deterrent at any time necessary to cope with the enemies' actions deliberately pushing the situation to the brink of a war," said armed forces minister Kim Yong-Chun.

The North accuses the South of provoking its November 23 bombardment of Yeonpyeong island, near the disputed Yellow Sea border, by holding a firing drill there.

The South Monday staged another drill on Yeonpyeong but the North did not follow through with threats of a new and deadlier attack.

On Thursday Seoul deployed tanks, artillery and jet fighters in a show of force on the mainland.

And the South's defence ministry announced Friday that a giant Christmas tree near the North Korean border would stay lit until January 8.

The move is likely to anger Pyongyang since the date marks the birthday of Jong-Un, youngest son of leader Kim Jong-Il. The communist North sees the tree topped with a glowing cross as a provocative propaganda symbol.

The ministry said it hoped to send "a message of peace to the North" and the timing was just a coincidence.

An international think-tank urged the two Koreas to accept international arbitration to redraw the flashpoint sea border and lessen the possibility of all-out war.

The International Crisis Group, like many other analysts and the Seoul government, said the North's attacks are linked to moves to install Jong-Un as eventual successor.

They are an apparent attempt "to give the inexperienced heir some appearance of military and strategic prowess", the ICG said in a report.

"They also signal to potential rivals among North Korean elites that Kim Jong-Il is willing to take on the South to promote his son and he would therefore have no problem confronting domestic opponents."

There is "a real danger" the North will continue its attacks, it said.

The South's military, accused of a feeble response to last month's attack, has vowed to hit back harder next time by using air power.

The North offered apparent nuclear concessions to US politician Bill Richardson, who ended a visit to Pyongyang this week.

Richardson said it agreed to readmit UN atomic inspectors and negotiate the sale of nuclear fuel rods to a third party.

The New Mexico governor said Thursday a resumption of six-nation talks -- grouping the two Koreas, the United States, China, Russia and Japan -- could help prevent a new escalation of tensions.

If "they don't react militarily again to this recent drill, then maybe the time has come for the six-party talks," he told CNN, referring to the South Korean exercise staged Thursday.

The North's news agency blamed the United States for the "alarming developments" on the peninsula this year.

It said Washington had orchestrated clashes to test a new military alliance it was forging with Japan and South Korea "to hold hegemony in the Asia-Pacific".

earlier related report
South Korea, China defense chiefs to meet
Seoul (UPI) Dec 27, 2010 - South Korea likely will press China to rein in North Korea's military when South Korean and Chinese defense ministers meet in February.

"Defense Minister Kim Kwan-jin will meet with his Chinese counterpart Liang Guanglie in Beijing during February," a South Korean defense ministry official said. "Working-level officials will meet in January to set the agenda for the meeting."

Announcement of the meeting comes amid rising tensions on the Korean Peninsula since North Korea unexpectedly shelled the South Korean island of Yeonpyeong in mid November.

The daylight attack, in which North Korea fired around 170 shells, damaged dozens of house and several military buildings. It also killed two South Korean marines and two civilians and injured at least 20 people. South Korean forces returned fire with 155mm K-9 self-propelled howitzers.

The last meeting between Chinese and South Korean defense officials was in May 2009. No date has been set for the meeting in February.

The official said Seoul and Beijing have been working on another meeting. But finalization of dates was delayed by North Korea's shelling of Yeonpyeong Island and the subsequent resignation of South Korean Defense Minister Kim Tae-young. He stepped down amid assertions that the military was caught unaware of a North Korean threat and was slow to respond to the North's attack.

South Korean President Lee Myung-bak accepted the minister's resignation "to improve the atmosphere in the military and to handle the series of incidents," a presidential official said at the time.

The North Korean attack was condemned by many of South Korea's allies, including the United States. Washington repeatedly urged China to do more to pressure its ally North Korea not to ramp up military tensions between the two Koreas officially still at war since the 1953 cease-fire agreement that split the peninsula into two countries.

The shelling is believed to have been in response to South Korean military exercises in the politically sensitive sea area where the main Yeonpyeong Island is less than 8 miles from the North Korean mainland.

Yeonpyeong lies near the Northern Limit Line, the sea boundary agreed to by both Koreas in the 1953 Armistice that ended three years war. But North Korea increasingly has contested the agreement in the past 15 years.

South Korea is widely expected to ask China to "act responsibly" in order to stem North Korea's additional provocations against the South.

"The defense ministers will likely exchange views on the North Korean attack and Pyongyang's torpedoing of a South Korean naval vessel, though the meeting will focus on promoting bilateral defense cooperation and peace in Northeast Asia," another ministry official said.

The Yeonpyeong Island attack and the March sinking of a South Korean naval patrol vessel, which killed 46 sailors, have left relations between the two Koreas at their worst for several years.

An international investigating team said it found strong evidence that the 1,200-ton Cheonan was split in half by a torpedo of North Korean manufacture. The team said the torpedo was likely fired by a small to mid-size submarine.

North Korea's National Defense Commission denied it had anything to do with the attack on the Cheonan.

The deteriorating inter-Korean relationship has resulted in more military drills and live-firing exercises by South Korea close to its borders with North Korea, including on Yeonpyeong Island, as well as sea exercises with its ally the United States in the Yellow Sea.

Little hope of improved Korean relations appears on the horizon, the Seoul think tank Institute for National Security Strategy said. North Korea is likely to be more hostile because military leaders will compete military actions against the South to impress the country's leader-in-waiting Kim Jong Un, 28.

Kim Jong Un, son of leader Kim Jong Il, will further consolidate his power by becoming a vice head of the National Defense Commission, of which his father is chairman.

North Korea will "strive to increase special forces and develop strategies for dominance in limited conflicts against South Korea," the INSS said. That could mean the North attacks vessels, front-line observation posts and defectors living in South Korea.