By Brian Rhoads

BEIJING (Reuters) - China said on Friday that U.S. and North Korean negotiators agreed with a handshake to keep diplomatic channels open after three days of closed-door talks to defuse the crisis over Pyongyang's nuclear weapons program.

A last-minute huddle between China's foreign minister and U.S. and North Korean negotiators appeared to have secured the pledge despite Pyongyang raising the stakes sharply with a reported admission that it already possessed nuclear weapons.

"All the participating parties considered the Beijing talks a good beginning of a process leading to the settlement of the North Korea nuclear issue," Chinese Foreign Ministry spokesman Liu Jianchao told Reuters.

"All the parties agreed to further study the positions of other sides and liaise through diplomatic channels on furthering the Beijing talks," he said in an interview.

Liu made no mention of U.S. assertions that communist North Korea made a dramatic claim to already having nuclear weapons during three days of talks at the secluded Diaoyutai State Guesthouse.

U.S. Assistant Secretary of State James Kelly has offered no public confirmation. But a Japanese official said the U.S. envoy informed Japan that his North Korean counterpart, Li Gun, had made the disclosure at lunch on Thursday.

A North Korea armed with weapons of mass destruction would increase the threat to neighboring Japan, China and South Korea and the 37,000 U.S. troops based there, and make it trickier to craft a solution to the six-month-old nuclear standoff.

President Bush dismissed the North's assertion as "the old blackmail game" and administration officials said it came as no surprise.

"They said what we always knew -- that they do have weapons. That doesn't shock us. We've been saying that. Now they said it," said one administration source who asked not to be named.

FIRST STEP

The United States hoped the talks might be a first step toward Pyongyang ending a nuclear weapons program disclosed in October.

The Washington Post, in a report on its Web site at www.washingtonpost.com, quoted a U.S. official as saying Li had pulled Kelly aside and said, in effect:

"We've got nukes. We can't dismantle them. It's up to you whether we do a physical demonstration or transfer them."

But an administration official told Reuters in Washington suggestions that North Korea had threatened to test a bomb were overblown.

"They never used the word testing," he said. "We're still translating but it's being overplayed a bit."

China also played down the disclosure.

On Friday morning, host China's Foreign Minister Li Zhaoxing stepped on to the scene, meeting separately with Kelly and Li Gun. Then all three met briefly before the three days of talks closed.

"While discussing such an important issue, it is not strange for differences to emerge," the minister said in a statement.

"The key is to pay attention to the substance and not rigidly adhere to formalities," he said. "While paying attention to the words and statements of the other side, we must emphasize even more their deeds."

The potential impact on the region of North Korea possessing nuclear weapons manifested itself quickly on Friday, with South Korea saying it could have a heavy impact on its economy and its credit rating.

South Korea's stock markets slumped nearly four percent to a three-week low and the won hit its weakest level in two weeks.

"North Korea's admission of nuclear weapons, if it is true, is really a grave matter," Deputy Finance Minister Kwon Tae-shin told Reuters. "It is really bad news for the economy and the sovereign rating."

BLUFF?

Foreign policy analysts said the North Koreans might be trying to deter any possible U.S. attack or to increase the pressure on Washington to meet their demand for security guarantees, aid and diplomatic recognition. They also said it was conceivable that the North Koreans were bluffing.

South Korean Foreign Minister Yoon Young-kwan told Reuters he was awaiting a briefing from Kelly, who was due in Seoul later on Friday and in Tokyo on Saturday.

"We will carefully examine the results of the meeting and come up with the best way to deal with the North Korean nuclear issue in close coordination with the United States, the United Kingdom and other countries," Yoon said a speech at a British-South Korean symposium.

Secretary of State Colin Powell also said the United States would not be intimidated by "bellicose statements" or threats.

He said Washington wanted a diplomatic solution but had not taken any options off the table -- a diplomatic phrase meaning military action had not been ruled out.

Under a 1994 pact, Pyongyang agreed to freeze its nuclear programs, including a spent fuel rod reprocessing plant that can yield plutonium. U.S. officials said Pyongyang admitted last year to a clandestine uranium enrichment program.

Some analysts believe the U.S.-led war on Iraq persuaded North Korea it needed a nuclear deterrent to avert a U.S. strike despite Washington saying it has no intention of attacking.

It "provides them a deterrent threat in the event that we would consider going after their nuclear facilities," said Eric Heginbotham, an Asia scholar at the Council on Foreign Relations.

Jim Steinberg of the Brookings Institution said the North Korean admission might make it more difficult to end the nuclear standoff because the United States was more likely to demand procedures to ensure the weapons have been dismantled.

"They may just be doing it to up the ante, to try to get others to put pressure on the United States to deal," he said. (additional reporting by Arshad Mohammed in Washington)