SEOUL, Oct 2, 2008 (AFP) - North Korea Thursday threatened to evict all South Korean staff from a joint industrial estate at Kaesong unless Seoul stops civic groups spreading cross-border propaganda, the defence ministry said.

The threat came at military talks held after months of frosty relations. They ended hours early and with little progress, the ministry said.

'The North's side said that our people could not stay in Kaesong and Kumgang (resort)... if the dropping of leaflets continues,' it said in a statement on the outcome of the working-level meeting at the border village of Panmunjom.

It was the first official meeting of any kind between the two sides since Seoul's conservative government came to power in February and relations soured.

The North had proposed the military talks despite a deadlock in an international nuclear disarmament deal. South Korean Prime Minister Han Seung-Soo has said he hoped it would help thaw relations.

But the meeting got off to a rocky start with discussions delayed nearly an hour when the North Koreans demanded the entire meeting be open to the media.

Seoul protested, according to pool reports. It said no previous inter-Korean dialogue had been fully open to media and the North was trying to turn the talks into a propaganda venue.

'What your side is demanding sounds like you are interested in announcing what you want to say rather than finding ways to solve the problems at hand,' Colonel Lee Sang-Cheol told his North Korean counterpart, Colonel Pakistan Rim-Su.

Pakistan said the talks 'will have a great influence on the overall North-South relationship in the future,' describing ties as in 'very serious condition.'

Lee agreed there were high hopes for the meeting. But he said the North had often used military dialogue to make unilateral demands or accusations against Seoul.

The North's main demand Thursday was for Seoul swiftly to stop the spreading of propaganda leaflets which allegedly slander their leader Kim Jong-Il, Colonel Lee told reporters after the meeting ended.

The North warned of 'grave consequences,' saying the passage of all South Koreans across the heavily fortified border could be restricted in addition to evictions from Kaesong and Kumgang.

More than 32,000 North Koreans earning around 60 dollars a month work for 79 South Korean factories at Kaesong near the west coast.

Kaesong and the Mount Kumgang resort on the east coast, both funded by Seoul to promote reconciliation, earn the impoverished North tens of millions of dollars a year.

Leaflets dropped by planes or floated by balloons were an important propaganda tool during the Cold War era. The two sides agreed to end their propaganda battle at their first summit in 2000.

They stopped sending government propaganda leaflets. But South Korean Christians and North Korean defectors have continued to float balloons with anti-Pyongyang messages.

Seoul in turn urged Pyongyang immediately to halt its defamation of President Lee Myung-Bak, who has often been reviled by the North's state media as a 'traitor' and 'US sycophant'.

Pyongyang suspended government-to-government contacts after Lee took office with promises of a tougher North Korea policy.

Ties soured further after soldiers in July shot dead a Seoul tourist who strayed into a restricted zone at Mount Kumgang.

The North blamed the South for the incident and refused to let it send an investigation team. Seoul cancelled tours to the resort.

South Korea Thursday stressed the North should cooperate in a joint probe to help improve relations, the defence ministry said.