The official ceremony near South Korea's border with the North is expected to be followed shortly by a similiar start across the Korean divide.
South Korean President Kim Dae-jung has symbolically started the work on a railway and four-lane highway linking the South and the Communist North.
The official ceremony near South Korea's border with the North is expected to be followed shortly by a similiar start across the Korean divide.
The railway line was last used during the Korean war 50 years ago and was severed shortly after.
When reconnected, it will link the southern capital Seoul to the North Korean capital, Pyongyang, and on to the city of Shinuiji on the northern border with China.
Key step
The South Korean Government sees the work as one of the most substantial steps towards full-scale cooperation with the North since the historic June summit, in which the Korean leaders pledged to turn their backs on half a century of hostilities.
"President Kim's lighting of the initial blast of dynamite signals the start of South's cooperation in earnest, leaving behind 55 years of mutual distrust and national pain," said South Korea's deputy minister for transport policy, Kim Se-chan.
The $91m highway alongside the railway will connect major expressways already in service in both Koreas.
But the railway and highway will have to cross the heavily fortified border separating the two Koreas, who still remain technically at war, since their three year conflict ended in 1953 in an armed truce and not a peace treaty.
Soldiers will be deployed to clear thousands of landmines which were laid as military deterrents.
Some conservative critics say work should not be beginning until both sides agree on steps to reduce military tensions, but work on the links in the South could be completed by September next year.
The government says that not only will they boost inter-Korean trade, but could turn the peninsula into an economic hub for north-east Asia, as there are plans to link the train tracks to the Trans-Siberian railway.