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Yang Yong-suk, Yonhap) KOREA OUT, Associated Press
South Korean Army's new recruits participate in their military camp in Nonsan, south of Seoul, South Korea, Monday, Jan. 3, 2011. South Korea's president vowed Monday not to let North Korea "covet even an inch of our territory." But he also opened the door to possible peace talks, saying North Korean disarmament could lead to South Korean economic aid.

SEOUL, South Korea — South Korea's president vowed Monday not to let North Korea "covet even an inch of our territory." But he also opened the door to possible peace talks, saying North Korean disarmament could lead to South Korean economic aid.

Lee Myung-bak, addressing the country in a New Year's speech, said the Nov. 23 shelling of Yeonpyeong Island, which killed four and has spiked fears of war, was a transformational event. Seoul, he said, would treat it as the United States did the Sept. 11, 2001, terrorist attacks and change the way it approaches national defense.

However, he said, "if the North exhibits sincerity, we have both the will and the plan to drastically enhance economic cooperation." Washington and Seoul have demanded that the North fulfill past nuclear disarmament commitments before allowing the resumption of stalled international aid-for-disarmament talks.

In the North Korean capital, tens of thousands gathered Monday for an annual New Year rally to display loyalty to leader Kim Jong Il, according to footage from APTN in Pyongyang.

The crowd packed Kim Il Sung plaza, pumping their fists in the air and shouting slogans while carrying huge portraits of Kim and his father, North Korean founder Kim Il Sung. Some waved huge red flags and played small drums, as top officials watched from an elevated viewing stand. Kim and his son and heir-apparent, Kim Jong Un, didn't appear in the footage.

Later Monday, North Korea called for Seoul to scrap its hostile policy against Pyongyang.

"As long as South Korea's dangerous northward invasion plot is maintained, North-South Korea relations cannot be improved at all and we cannot think about the nation's safety and peaceful reunification," the North's main Rodong Sinmun newspaper said in a commentary carried by the official Korean Central News Agency.

Despite Lee's mention of peace talks, the overwhelming focus of his comments on North Korea was a tough promise to improve South Korea's defenses. Any new provocation, he said, "will be met with stern, strong responses."

Lee was severely criticized for acting too slowly and too weakly after the shelling near the Koreas' disputed western sea border — the North's first attack on a civilian area since the 1950-53 Korean War. His government has responded by replacing the defense chief, strengthening security and pushing to deploy additional troops and weaponry to Yeonpyeong, which lies just seven miles (11 kilometers) from North Korean shores.

After the Sept. 11 terrorist attacks, the United States devised new security strategies, Lee said. "The shelling of Yeonpyeong Island also served as an opportunity for us to reflect on our security readiness and overhaul our defense posture," he said.

Under Lee's conservative administration, relations between the two Koreas have deteriorated as he reversed policies of earlier liberal-leaning administrations he saw as rewarding aggression.

The North attacked Yeonpyeong, killing two civilians and two marines, after warning the South not to conduct live-fire drills there. North Korea claims the waters around Yeonpyeong as its own territory.

That shelling and subsequent South Korean military live-fire drills on Yeonpyeong and near the Koreas' tense land border have put the region on edge and fired fears of renewed violence.

Lee's speech came two days after North Korea called in a New Year's message for better ties and the resumption of joint projects with South Korea.

Meanwhile, the United States, which has about 28,000 troops in the South, is sending its top envoy on North Korea, Stephen Bosworth, to Seoul. Bosworth arrives Tuesday and has meetings Wednesday with South Korean officials. U.S. Defense Secretary Robert Gates is planning a visit to Seoul next week.

And on Jan. 19, Chinese President Hu Jintao will be feted in Washington by Obama with a state dinner. China is the North's only major ally and main benefactor, and the Hu-Obama meeting will be closely watched for signs of diplomatic breakthroughs.