By Jack Kim

SEOUL (Reuters) - Red Cross officials from North and South Korea begin three days of talks on Wednesday in a rare contact between the rivals to discuss the plight of families separated by the 1950-53 Korean War.

The meeting, in the North Korean resort of Mt. Kumgang on the east coast, is the first such contact in two years and the first meeting to discuss humanitarian issues since conservative President Lee Myung-bak took office in the South.

"The key issue on the agenda for this meeting is the reunion of separated families," South Korea's chief delegate to the talks, Kim Young-chel, told reporters before leaving Seoul.

Pyongyang stopped the reunions almost two years ago in anger at the South's conservative government for halting unconditional aid handouts and linking its largesse to the North ending its nuclear arms ambitions.

Lee had his first chance to directly tell North Korean officials of his policy on Sunday when he met a delegation that had flown to Seoul to mourn former President Kim Dae-jung, who was buried the same day.

The delegation and the agreement to hold the Red Cross talks are part of a series of conciliatory gestures from Pyongyang that also included reopening of their border to commercial traffic and a reported invitation for U.S. envoys to visit Pyongyang to hold talks on its nuclear arms program.

But analysts and traders said the softening tone was still not enough to lift the risk discount that weighs on the South Korean financial markets due to the security threat posed by a confrontational North.

"South Korea's geopolitical factor is still priced in, and the latest friendlier gestures by the North do not change that," Samsung Securities market analyst Hwang Keum-dan said.

"However, a softer approach by the North certainly comes as a positive development and should be an added help for market sentiment."

A U.S. official charged with enforcing U.N. sanctions on the North for its defiant missile and nuclear tests said that although it was still too early to gauge precisely, the punishment was making an impact.

"We've seen some indication that the overall effort is working," Philip Goldberg told reporters in Tokyo. "I don't want to say whether or not, or judge exactly how much and what kind of result we can expect at this point."

Some analysts said the moves to open up to the outside world may be prompted by an increasingly tight squeeze the arms and financial sanctions are taking on the cash-strapped country that relies heavily on weapons trade as a source of revenue.

Just under 20,000 Koreans from both the South and the North have been reunited in fleeting meetings with separated family members since the two Koreas sought to improve ties in 2000 after their first summit meetings since the war.

Hundreds of thousands of others await word through the Red Cross that parents, siblings and children are alive on the other side of the world's most heavily militarized border.

South Korea has urged the North through the Red Cross talks to explain the whereabouts of more than 1,000 South Korean prisoners of war and civilians believed to be held in the North.

(Additional reporting by Jungyoun Park in Seoul and Yoko Kubota in Tokyo; Editing by Jonathan Thatcher)