Kim Jong-il held talks with Hyundai's chairwoman in Pyongyang
North Korea has agreed to reopen its border with South Korea and allow tourism and family reunions to resume, the North's KCNA news agency said.
But at the same time KCNA reported that the entire country had been ordered on to special alert over joint US-South Korea military exercises.
The border move followed talks between the North's leader Kim Jong-il and the head of the South's Hyundai group.
It also raised hopes for a return to talks on the North's nuclear programme.
South Korean media have reported that China's top nuclear envoy is likely to visit the North Korean capital, Pyongyang, later on Monday.
'Prompt annihilating strike'
The North has shown some recent signs of improving its foreign relations.
It recently pardoned two jailed US journalists.
The visit of the chairwoman of Hyundai, Hyun Jeong-eun, also won the release of a detained worker who had been held since March for allegedly criticising Pyongyang's regime.
Hyundai heads up tourism to the North and operates a joint factory just north of the border that is a key source of revenue for the impoverished regime.
However, there was no word on whether Hyundai had agreed to the North's demands for large wage increases for workers at the Kaesong industrial park.
The KCNA statement said that South Korean tourists and business people would soon be allowed to cross freely.
It also said it would allow more reunions of Korean families - separated since the 1950-1953 war - starting around Chuseok, the Korean harvest festival, which falls on 3 October.
But the BBC's John Sudworth in Seoul says it is unclear whether the South will agree to the resumption of the tours.
It has said the trips will not be allowed to resume until it gets an apology and an explanation for the shooting death of a 53-year-old South Korean tourist by North Korean soldiers last year.
The meeting between Kim Jong-il and the Hyundai officials came a week after Pyongyang released the two US journalists following an unexpected visit by former US President Bill Clinton.
However, in keeping with its usual response to South Korea's military exercises, the North vowed to retaliate for any breach of its sovereignty with a nuclear attack.
It threatened a "merciless and prompt annihilating strike at the aggressors", saying the drills south of the border were a "grave threat" to peace and a prelude to an invasion.
The North quit multilateral talks aimed at ending its nuclear programme last year, preferring direct talks with the United States.
China, the US, Russia, South Korea and Japan want the North to rejoin a process in which aid will bring an end to the North's nuclear threat.
But the North carried out nuclear and missile tests in May.
The North's leader, Mr Kim is believed to be ill and is thought to have designated his youngest son as his successor, but fears remain for the stability of the impoverished state.