"It is about time Pyongyang looked straight at reality, made a courageous change and came up with a drastic decision," Lee said.

The Koreas "need to overcome the current state of division and proceed with the goal of peaceful reunification," he said in a speech to celebrate Korea's liberation from Japanese colonial rule in 1945.

Lee also warned that South Korea would not tolerate any military provocations from North Korea.

"The North must never venture to carry out another provocation nor will we tolerate it if they do so again," he said.

Cross-border tensions have been high since late May when South Korea and the United States accused Pyongyang of attacking a South Korean warship.

The North, which vehemently denies the accusation, threatened retaliation after US and South Korean troops staged naval drills in a show of force.

Relations further worsened after North Korea last weekend seized a South Korean squid fishing boat operating off the east coast.

The North also fired an artillery barrage into waters in the Yellow Sea a week ago when South Korea wrapped up its biggest anti-submarine drill.

In his speech, Lee detailed a multi-step blueprint for reunification, starting with a "peace community" after the peninsula is cleared of nuclear weapons.

The next step is to dramatically develop the North's economy and form an "economic community in which the two will work for economic integration", he said.

Finally, the Koreas would be able "to remove the wall of different systems" and establish a community which will ensure "dignity, freedom and basic rights of all individuals", he said.

"Through this process, we can ultimately bring about the peaceful unification of Korea," he added.

Lee also proposed "unification tax" to finance the hefty cost of reuniting the long-divided nations with a growing economic gap.

Reunification with its impoverished neighbour would cost the South about 1.3 trillion dollars, according to a study commissioned by a parliamentary committee.

Central bank data showed the North's gross domestic product last year stood at 24.7 billion dollars, less than three percent of South Korea's.

Lee, who is halfway through his single five-year term, has advocated a hard-line approach towards Pyongyang unlike his liberal predecessors.

In his biggest cabinet reshuffle a week ago, Lee kept his foreign, defence and unification ministers in place, signalling little change in his policy.

The Korean peninsula was divided into a communist North and a capitalist South after Japan's surrender on August 15, 1945 at the end of World War II ended its annexation of the peninsula.

Lee welcomed Japan's efforts to improve ties but said some issues had yet to be resolved.

"I have taken note of Japan's effort, which represents one step forward," he said.

Japanese Prime Minister Naoto Kan, who has sought stronger ties with South Korea, issued a fresh apology Tuesday for colonial rule and promised to hand over precious Korean cultural artifacts.

Lee praised Kan for issuing an apology.

"However, there still remain issues that have to be resolved. The two countries are called upon to take concrete measures to forge a new relationship for another 100 years," he said, without elaborating.

The two countries normalised relations in 1965, but Japan has often been criticised by its neighbours for glossing over wartime atrocities.

related report
S.Korea leader vows not to tolerate N.Korea provocation
South Korean President Lee Myung-Bak said Sunday that he would not tolerate any military provocations from North Korea amid high cross-border tensions.

"The North must never venture to carry out another provocation nor will we tolerate it if they do so again," Lee said in a speech to celebrate Korea's liberation from Japanese colonial rule in 1945.

Tensions have risen sharply since late May when South Korea and the United States, citing a multinational investigation, accused the North of torpedoing one of Seoul's warships near the contested border.

The North vehemently denies involvement in the March incident in which 46 sailors were killed.

Relations worsened further after North Korea a week ago seized a South Korean fishing boat off the east coast and fired an artillery barrage into waters near the disputed Yellow Sea border.

Lee proposed a "new paradigm" in relations, saying the North should make a "courageous" change.

The Koreas "cannot afford to repeat the unfortunate history punctuated by mutual distrust and confrontation", he said.

"It is about time Pyongyang looked straight at reality, made a courageous change and came up with a drastic decision. It should not be afraid of making change," he added.

Japan's annexation of the Korean Peninsula ended on August 15, 1945, when Tokyo surrendered to the US-led allies in World War II. The Korean peninsula was then divided into a communist North and a capitalist South.

Lee unveiled a multi-step reunification plan, saying the Koreas should first form a "peace community" and beef up economic ties.

"What is most important in this connection is the denuclearisation of the peninsula," he said.

The next step would be to form an economic community through comprehensive exchanges and cooperation which would contribute to dramatic economic development in the North, he said.

Finally, the Koreas would be able to remove "the wall of different systems and establish a community of the Korean nation that will ensure dignity, freedom and basic rights of all individuals", he said.

"Through this process, we can ultimately bring about the peaceful unification of Korea," he said.

He also proposed a special tax to fund the huge cost of reunification.

Lee, who is halfway through his single five-year term, has advocated a hard-line approach towards Pyongyang unlike his liberal predecessors.

In his biggest cabinet reshuffle a week ago, Lee kept his foreign, defence and unification ministers in place, signalling little change in his policy.

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