By Jack Kim and Jon Herskovitz
SEOUL (Reuters) - North Korea is preparing for a third atomic test that may come in May or June, South Korean broadcaster YTN reported on Tuesday, an act that could further isolate Pyongyang and complicate already troubled nuclear diplomacy.
South Korean Foreign Minister Yu Myung-hwan dismissed the report, saying Seoul had seen no evidence.
"If North Korea was making such preparations, there would be related circumstances that can be detected ... there is no intelligence on such circumstances," Yu told a news briefing.
The preparations began in February and involve a level of technical proficiency that is significantly upgraded from the first two tests, considered partial successes at best, YTN quoted an unnamed diplomat as saying.
North Korea has boycotted international nuclear disarmament talks for over a year and put conditions on its return that include ending U.N. sanctions imposed after its last test in May 2009 that dealt a severe blow to its feeble economy.
North Korea, scrutinized by U.S. spy satellites, can easily signal it is preparing for a test by moving equipment but that does not mean a blast is imminent, analysts said.
A third test would improve North Korea's ability to make nuclear weapons but also decrease its supply of fissile material, thought to be enough for six to eight nuclear bombs, experts say.
HEDGING ITS BETS
Destitute North Korea may be trying to hedge its position, experts said. It needs the aid that comes with making progress in nuclear disarmament talks but also wants the world know it can rattle the region with another nuclear test if discussions fail.
"The North is likely to first show that it may conduct a test and then try to prod China and the United States (into making concessions)," said Lee Jong-won, an expert on the North at Japan's Rikkyo University.
Leader Kim Jong-il is expected to soon go to China, his state's biggest backer and closest thing it can claim as a major ally, where he may try to win sweeteners for returning to the six-country talks hosted by Beijing, experts said.
Kim's leadership has been tested by a failed currency move late last year that exacerbated food shortages among an impoverished public and sparked rare civil unrest.
This raised questions about his ability to anoint his youngest son as heir to the state his family has ruled for more than 60 years.
Previous nuclear tests, trumpeted at home, have boosted Kim's stature with his country's powerful armed forces and rallied the masses around his guiding military-first rule.
A German former aid worker in North Korea told reporters in Beijing that farmers had been resisting accepting the new currency following the reform which, she said, was threatening already precarious food supplies.
"Some people thought that after some time everything will be fine again. But then when they said at the beginning of January that nobody could use any foreign currency, then people became really unhappy," said Karin Janz, who until February 1 was North Korea country director for German NGO Welthungerhilfe.
Market players, who have grown used to the North's saber rattling, said the report had no major market impact. The North's two previous nuclear tests caused brief, and quickly reversed, falls in local shares and the Korean won.
Investors said markets would move on acts that raise the chance of war, shaking the export-based economies of North Asia that are responsible for about one-sixth of the global economy.
"North Korea should come to its senses. The people are suffering and they spent 6 billion won ($5.37 million) in fireworks on founder Kim Il-sung's birthday. Imagine how much corn that could buy," South Korean President Lee Myung-bak said.
(Additional reporting by Christine Kim in Seoul, Yoko Kubota in Tokyo and Ben Blanchard in Beijing, editing by Jonathan Thatcher and Ron Popeski)