The North and South Korean soldiers stood rigidly to attention, staring at one another across the last front of the Cold War, seemingly oblivious to the icy wind and this winter’s first dusting of snow.

If ever there was a sight to chill the heart it was here at Panmunjom, in the beautiful but intimidating surroundings of Korea’s demilitarised zone (DMZ). Along a 241km (150mile) corridor are assembled two of the world’s largest standing armies, ready to go into action at a few minutes’ notice and resume a bloody campaign that was suspended, but not finished, 54 years ago.

On the surface the deadlock seems intractable. A Stalinist regime, armed with nuclear weapons, is locked in an existential contest with a rich, democratic, capitalist state, supported by tens of thousands of American troops. But beyond the clichés of the conflict and the tired propaganda, South Korean and Western officials believe that, for the first time since an armistice came into effect in 1953, there is a real chance that a peace treaty that will formally end the state of war on the Korean peninsula may finally be within their grasp.

No expert on the region would be brash enough to make any firm predictions about Kim Jong Il, the eccentric North Korean dictator who runs the world’s most secretive and ruthless regime. But there is agreement that the political forces at work seem to be moving towards the same objective. “There is a lot of hard work to do, but we could end up with a peace treaty in a year or two,” said a Western diplomat in Seoul. A South Korean official echoed the view. “I think we have the chance to go all the way,” he said.

President Bush, who has only a year left in the White House, desperately wants an enduring legacy to offset his foreign policy setbacks in the Middle East. Peace in Korea, which has eluded nine presidents before him, would guarantee his place in history.

Christopher Hill, the US envoy to the region, is regarded as so eager to cut a deal with Pyongyang that he has earned the nickname “Kim Jong Hill” by his critics.

President Roh Moo Hyun of South Korea is pressing even harder. He is putting into motion a series of bilateral agreements with North Korea that would commit his country to peaceful cooperation, even after he steps down from office at the end of next month. Behind his drive is the dream of many Koreans that their nation will be united again.

China, the only ally of North Korea, wants Pyongyang to stop being an international embarrassment and follow Beijing’s path towards free market prosperity under firm Communist Party control. Finally, North Korea, facing international isolation and economic collapse, would like to make peace with the US and to salvage its economy while keeping the current regime firmly in place.

Much of the initial work is under way, focusing on North Korea’s nuclear infrastructure. A team from the US is dismantling the nuclear reactor at Yongbyon, which should be disabled by the end of the year. Pyongyang is also due to make a full declaration about the rest of its nuclear programme.

If the North Koreans comply fully, then America will begin to supply the first instalment of one million tonnes of heavy fuel oil to Pyongyang. The Bush Administration has also undertaken to remove North Korea’s name from the list of states that sponsor terrorism. The next step could be the establishment of diplomatic relations between Washington and Pyongyang.

The Americans are also reducing the size and profile of their presence in South Korea. There are only 40 American troops left in the demilitarised zone, where thousands were once deployed.

The US army base in Seoul is being handed back to the Koreans and a new base for a smaller force being built to the south of the capital. American commanders are due to hand over operational command of all forces to South Korea by 2012.

While the two old enemies are cooperating on an unprecedented level, South Korea is also trying to forge a relationship with Pyongyang through business. It was agreed yesterday to run a daily cargo train service across the border, the first rail link with the North to open in more than half a century. Defence ministers from the two states are due to meet next week to discuss opening their territorial waters to commercial fishing.

South Korean businesses are also planning to expand operations in the flourishing economic zones established in the North.

The pace and scope of the peace efforts worries many people, however. Lee Myung Bak, the right-wing opposition presidential candidate who is leading in the polls, has pledged to review the relationship with the North if he comes to power next month.

“We must not be hasty. We must proceed with caution. We have to remember the sort of regime we are dealing with,” Hwang Jin Ha, a security expert and MP in Mr Lee’s Grand National Party, said.

A veteran of the stand-off at Panmunjom put it more bluntly. “There will only be peace when the last North Korean leader is dead and buried,” he said.

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