UPDATE 1-Top U.S. diplomat says Moon-Abe meeting is 'encouraging sign' for countries' relations

Hyonhee Shin

countries' relations@ (Adds S.Korea statement, activists' protest)

SEOUL, Nov 6 (Reuters) - The United States was "very encouraged" by a recent meeting between the leaders of South Korea and Japan, a top U.S. diplomat said on Wednesday, as strained ties threatened to undercut three-way security cooperation on North Korea.

U.S. Assistant Secretary of State David Stilwell arrived in Seoul on Tuesday as relations between Seoul and Tokyo, key U.S. allies, have plunged to their worst state in decades after South Korea's top court ordered Japanese firms to compensate wartime forced laborers last year.

But South Korean President Moon Jae-in and Japanese Prime Minister Shinzo Abe had an 11-minute conversation on the sidelines of an international conference in Bangkok on Monday, also attended by U.S. officials, the first time they had met in more than a year.

"Very encouraged while we were there to note that President Moon and Prime minister Abe had the opportunity to talk," Stilwell told reporters after meetings with South Korean officials. "That's an encouraging sign as we watch the relationship improve."

His visit came as an intelligence-sharing pact between South Korea and Japan is set to expire this month. Seoul decided not to renew the agreement, known as GSOMIA, amid a spiraling political and trade row, a decision that Washington has criticized.

Stilwell met with South Korean Foreign Minister Kang Kyung-wha and Vice Foreign Minister Cho Sei-young, but did not respond to a question on whether they discussed the situation.

Seoul's foreign ministry said Kang explained its efforts to craft a "reasonable solution" to the feud with Japan during the meeting.

"The U.S. side said those efforts are encouraging and agreed that such efforts should continue going forward," the ministry said in a statement.

Both sides were also expected to discuss ways to reinvigorate stalled denuclearisation talks between the United States and North Korea.

Envoys from the two countries met in Stockholm last month for the first time since U.S. President Donald Trump and North Korean leader Kim Jong Un agreed in June to reopen negotiations after a failed summit in Vietnam in February. But the meeting fell apart, with the North's envoy saying the U.S. side failed to show flexibility.

They could hold a fresh round of talks as soon as mid-November as Kim set sights on another summit with Trump in December, a South Korean lawmaker said on Monday after being briefed by a spy agency.

As the meetings were under way, a group of activists rallied in front of the ministry building, deriding what they call a U.S. attempt to "squeeze" its ally over the GSOMIA decision and defense cost-sharing talks.

James DeHart, the U.S. representative in the negotiations, designed to determine how costs are divided for the upkeep of 28,500 U.S. troops in South Korea, was also in Seoul.

The lackluster nuclear talks also affected inter-Korean cooperation, stalled after a flurry of summits last year.

Kim last week vowed to remove South Korea's "shabby," "capitalist" facilities from the North's Mt. Kumgang resort, once a symbol of cross-border rapprochement.

The South's Unification Ministry, which is in charge of inter-Korean ties, said on Wednesday it has proposed sending a delegation of officials from the government and companies that built the facilities for an inspection, after the North rejected its offer of talks.

(Reporting by Hyonhee Shin. Editing by Gerry Doyle)