In his New Year policy address on Monday, just days after Pyongyang called for improved relations in 2011, South Korean President Lee Myung-Bak also urged the North to abandon its "military adventurism."
Relations between the two Koreas plunged after the North shelled a border island in November, killing four people, including two civilians.
The South has since staged a series of military exercises, including a live-fire drill on December 20 on the island but the North did not follow through with threats of a new and deadlier attack.
Despite the heightened tensions, Lee held out hopes for improved ties, saying the door for talks was "still open". "If the North exhibits sincerity, we have both the will and the plan to drastically enhance economic cooperation together with the international community," he said.
"The North must come to the realisation that nothing can be gained through military adventurism... Nuclear weapons and military adventurism must be discarded," he added.
The North, in a joint New Year editorial of state media on Saturday, said tensions "should be defused as early as possible," stressing dialogue and cooperation "should be promoted proactively." "This year we should launch a more determined campaign to improve inter-Korean relations," it said.
About 100,000 people rallied Monday in Pyongyang, holding portraits of leader Kim Jong-Il and his late father who founded the communist country, the South's Yonhap news agency said.
The rally, shown on state television, was organised by Pyongyang to draw support for its New Year goals, Yonhap said. Analysts said Lee, in the South's first response to the North's New Year message, was telling Pyongyang that Seoul was ready to revive talks, which have been at a standstill for three years.
"This is Seoul's answer to Pyongyang's New Year editorial that it is politically ready to revive talks," said Baek Seung-Joo of the Korea Institute for Defense Analyses.
The North's attack on Yeonpyeong island, the first on a civilian area since the 1950-53 Korean War, drastically heightened tension and sparked a regional crisis.
The South's flurry of military exercises drew an angry response from Pyongyang.
World leaders were quick to condemn the November 23 attack, with many calling on China to rein in its unruly ally, something Beijing so far appears unwilling to do.
China instead proposed bringing together the envoys of the long-stalled six-nation disarmament talks on the nuclear-armed North to defuse tension.
But Seoul, Washington and Tokyo have been lukewarm, saying Pyongyang first needs to show sincerity for denuclearisation and to mend ties with Seoul.
"North Korea is holding the key. What's more important is its sincere attitude," South Korean foreign ministry spokesman Kim Young-Sun said, ahead of US envoy Stephen Bosworth's trip this week to Seoul, Beijing and Tokyo.
Baek said breakthroughs in relations were often made possible by the determination of political leaders, despite very difficult diplomatic circumstances.
"Political leaders' will is often far more important than circumstances in inter-Korea relations," he said, citing the first inter-Korean summit in 2000, which came a year after a naval clash near the sea border left dozens of North Korean sailors dead.
"Behind-the-scene preparations for the 2000 summit started only months after the naval clash," Baek said.
But Rodong Sinmun, the North's communist party daily, said Monday that relations would improve only if Seoul ends "dangerous moves for a war".
"If peace is to be ensured on the peninsula, it is imperative to put an end to their reckless moves for confrontation and war, first of all."