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UPDATE 4-S.Korea-Japan talks falter ahead of decision on favoured-trade list

Hyonhee Shin

* Japan expected to remove S.Korea from so-called 'white list'

* Both sides hold highest-level talks since Japan's export curbs

* Relations between old foes at lowest ebb since 1965

* Pompeo hopes allies will 'find themselves a path forward' (Adds bullet points, Pompeo comment, paragraphs 26-27)

BANGKOK, Aug 1 (Reuters) - South Korea called on Thursday for Japan to allow more time for diplomacy as talks on their most serious dispute in years failed to make progress, a day before Japan could remove South Korea from its list of favoured trade partners.

South Korea warned that if Japan were to drop it from its so-called white list of countries that enjoy minimum trade restrictions, there could be sweeping repercussions, including damage to bilateral security cooperation.

Relations between Japan and South Korea, plagued by bitterness over Japan's 1910-1945 occupation of the Korean peninsula, are arguably at their lowest since they normalised ties in 1965.

A spiralling row over the past month is threatening to disrupt the global supply of semiconductors and undercut security cooperation on North Korea.

South Korea's foreign minister, Kang Kyung-wha, held talks with her Japanese counterpart, Taro Kono, on the sidelines of a Southeast Asian conference in Bangkok on Thursday.

The meeting was the highest-level talks since Japan tightened curbs last month on exports to South Korea of high-tech materials, accusing its neighbour of inadequate management of sensitive items.

But the talks yielded little progress, with a South Korean foreign ministry official saying there was "virtually no change" in Japan's stance.

Japan is expected to drop South Korea from its white list of countries that enjoy smooth trade. A South Korean ministry official said it was "highly likely" to happen on Friday.

Kang said she urged Kono to stop that process or it would force South Korea to craft countermeasures.

'NO OPTION'

South Korean officials have warned they may reconsider an intelligence sharing accord with Japan if the feud worsens.

The bilateral accord, known as the General Security of Military Information Agreement (GSOMIA), is automatically renewed every August. It is chiefly aimed at countering North Korea's nuclear and missile threats.

"As Japan cited security reasons for its trade restrictions, I said we will have no option but to review the various elements that form the framework of security cooperation with Japan," Kang told reporters, when asked whether South Korea would keep the GSOMIA if it was dropped from the Japanese list.

"I made it clear that we need the time and room to make efforts to find a way to resolve the issue through consultations."

There was no immediate comment from Japan's foreign ministry.

A Japanese government source said that Tokyo's stance was to try to keep the trade and history dispute separate from security matters, including the renewal of the GSOMIA.

Japan's Kyodo news agency reported Kono had asked South Korea to take steps to prevent any damage to the Japanese firms ordered to pay compensation to former labourers.

The export restrictions came as Japan was already angry about a South Korean court ruling last year that Japanese firms had to pay compensation to South Koreans forced to work in Japanese factories during Japan's occupation of the Korean peninsula from 1910 to 1945.

Japan says the issue of compensation for its wartime actions had been settled by a 1965 treaty and it asked South Korea to seek international arbitration to resolve the dispute.

'PRACTICAL AND SYMBOLIC'

The 55-minute talks began with a frosty greeting.

Both Kang and Kono appeared stony-faced as they shook hands, and Kang focused on reviewing documents she brought before making opening remarks, shunning eye contact.

Any change in security cooperation between Japan and South Korea would likely worry the United States, which played a key role in initiating the hard-won GSOMIA, which facilitates three-way intelligence sharing.

The two countries clinched the deal in 2016 in the face of domestic opposition toward military cooperation with the old foe.

The United States has urged its two key Asian allies to consider reaching a "standstill agreement" to forestall any further action and allow time for negotiations, a senior U.S. official told reporters on Tuesday.

U.S. Secretary of State Mike Pompeo said on Thursday he hoped the two would find a solution by themselves, stressing "incredibly important" cooperation on North Korea.

"We're very hopeful that those two countries will together themselves find a path forward, a way to ease the tension that has resumed over the past 10 follow weeks," Pompeo told a news conference in Bangkok.

South Korea's spy chief, Suh Hoon, called for caution in nullifying the GSOMIA, telling a parliamentary intelligence panel that it had both "practical benefits and symbolic meanings", said Lee Eun-jae, a lawmaker who attended the meeting. (Reporting by Hyonhee Shin in BANGKOK; Additional reporting by Hyunjoo Jin and Sangmi Cha in SEOUL and Linda Sieg and Christopher Gallagher in TOKYO; Editing by Michael Perry, Robert Birsel)