(Corrects 24th paragraph to show that the U.S. official spoke about what Japan believes, and to add full quote to show that he spoke more widely about what Japan believes were the results of Seoul's actions.)
* Japan expected to remove S.Korea from so-called 'white list'
* Both sides hold highest-level talks since Japan's export curbs
* Relations between old foes at lowest ebb since 1965
* Pompeo hopes allies will 'find themselves a path forward'
By Hyonhee Shin
BANGKOK, Aug 1 (Reuters) - South Korea called on Thursday for Japan to allow more time for diplomacy as talks on their most serious dispute in years failed to make progress, a day before Japan could remove South Korea from its list of favoured trade partners.
South Korea warned that if Japan were to drop it from its so-called white list of countries that enjoy minimum trade restrictions, there could be sweeping repercussions, including damage to bilateral security cooperation.
The U.S. government is worried the tensions could get worse. The United States has not been asked to mediate but has urged both sides to consider a "standstill agreement" to buy more time for talks, a senior U.S. administration official told reporters in Washington, speaking on condition of anonymity.
Relations between Japan and South Korea, plagued by bitterness over Japan's 1910-1945 occupation of the Korean peninsula, are arguably at their lowest since they normalised ties in 1965.
A spiralling row over the past month is threatening to disrupt the global supply of semiconductors and undercut security cooperation on North Korea.
South Korea's foreign minister, Kang Kyung-wha, held talks with her Japanese counterpart, Taro Kono, on the sidelines of a Southeast Asian conference in Bangkok on Thursday.
It was the highest-level meeting since Japan tightened curbs last month on exports to South Korea of high-tech materials, accusing its neighbour of inadequate management of sensitive items.
The 55-minute talks began with a frosty greeting. Both Kang and Kono appeared stone-faced as they shook hands, and Kang focused on reviewing documents she brought before making opening remarks, shunning eye contact.
The talks yielded little progress, with a South Korean foreign ministry official saying there was "virtually no change" in Japan's stance.
A South Korean ministry official said it was "highly likely" that Japan would drop South Korea from its white list on Friday, while Jun Saito, a deputy press secretary in Japan's foreign ministry, said there was no need to speculate and "we have to see the situation."
Kang said she urged Kono to stop that process or it would force South Korea to craft countermeasures.
South Korean officials have warned they may reconsider an intelligence sharing accord with Japan if the feud worsens.
The bilateral accord, known as the General Security of Military Information Agreement (GSOMIA), is automatically renewed every August. It is chiefly aimed at countering North Korea's nuclear and missile threats.
"As Japan cited security reasons for its trade restrictions, I said we will have no option but to review the various elements that form the framework of security cooperation with Japan," Kang told reporters, when asked whether South Korea would keep the GSOMIA if it was dropped from the Japanese list.
The United States played a key role in initiating the hard-won GSOMIA, which facilitates three-way intelligence sharing. The two countries clinched the deal in 2016 in the face of domestic opposition toward military cooperation with the old foe.
South Korea's spy chief, Suh Hoon, called for caution in nullifying the GSOMIA, telling a parliamentary intelligence panel that it had both "practical benefits and symbolic meanings", said Lee Eun-jae, a lawmaker who attended the meeting.
A Japanese government source said Tokyo wants to keep the current dispute separate from security matters, including the renewal of the GSOMIA.
Japan is also angry about a South Korean court ruling last year that Japanese firms had to pay compensation to South Koreans forced to work in Japanese factories during Japan's occupation of the Korean peninsula from 1910 to 1945.
Saito said the two ministers had "candid, extensive and professional discussions." But the court ruling amounted to a violation of international law, which Kono urged Kang to rectify, he said.
"I have to admit that bilateral relations are in a tense moment, but that makes it all the more important for both authorities to give utmost efforts to manage that and try to resolve the issue in a mutual way," Saito told reporters in Bangkok.
Japan says the issue of compensation for its wartime actions had been settled by a 1965 treaty and it asked South Korea to seek international arbitration to resolve the dispute.
Tensions could worsen if frozen assets of Japanese companies in Korea are liquidated to settle the compensation, the U.S. senior administration official warned.
Washington is concerned that Seoul has been willing to take steps that encourage anti-Japanese sentiment, the official told reporters, speaking on condition of anonymity.
Japan believes that some of Seoul's actions "have had the effect of undermining trust between Tokyo and Seoul, trust in the foundation of that relationship, and also appear to have been aimed or even calculated for political effect to whip up anti-Japanese sentiment in South Korea," the official said. "That is something that we are concerned about."
U.S. Secretary of State Mike Pompeo said on Thursday he hoped the two would find a solution by themselves, stressing "incredibly important" cooperation on North Korea.
"We're very hopeful that those two countries will together themselves find a path forward, a way to ease the tension that has risen between them over these past handful of weeks," Pompeo told a news conference in Bangkok. (Reporting by Hyonhee Shin in BANGKOK; Additional reporting by Hyunjoo Jin and Sangmi Cha in SEOUL, Linda Sieg and Christopher Gallagher in TOKYO, and Roberta Rampton in WASHINGTON; Editing by Michael Perry, Robert Birsel and David Gregorio)