BEIJING -- U.S. and North Korean negotiators met briefly on Friday in talks raised dramatically in profile by a reported Pyongyang admission that it already possesses nuclear weapons.

U.S. President George W. Bush dismissed the Communist 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.

The source said the admission came during talks among U.S., North Korean and Chinese officials which the United States hoped might be a first step towards Pyongyang ending a nuclear weapons program disclosed in October.

The ***Washington Post***, in a report on its website at www.washingtonpost.com, quoted a U.S. official as saying North Korean negotiator Li Gun had pulled U.S. Assistant Secretary of State James Kelly aside. The newspaper's source quoted Li as saying, 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."

Kelly and North Korean counterpart Li Gun each had separate meetings with Chinese Foreign Minister Li Zhaoxing on Friday morning and then there was a brief, trilateral meeting, a U.S. embassy spokesman told Reuters.

But there was no immediate word on where the talks stood or whether there would be more. --- South Korean Fears ---

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. "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."

The CIA has estimated that North Korea had enough plutonium to build one or two nuclear weapons and U.S. officials have said previously they believed it had gone a step further and produced the weapons.

North Korea's admission to the United States means Pyongyang could use the weapons to threaten South Korea, Japan, China or the 37,000 U.S. troops based in South Korea and could make it harder to craft a solution to the six-month-old nuclear standoff.

Foreign policy analysts said the North Koreans might have been 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. "They're back to the old blackmail game," bush said. "We are not going to be threatened."

Secretary of State Colin Powell also said the United States would not be intimidated by "bellicose statements" or threats and suggested the Beijing talks were contentious.

Powell 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.

"The North Koreans should not leave the meetings in Beijing," he said "With the slightest impression that the United States and its partners will be intimidated by bellicose statements or by threats," Powell told the U.S. Asia-Pacific Council. "They would be very ill-advised to move in that direction." --- North Seeks Deterrent? ---

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 ward off a U.S. attack despite Washington's statements that it has no intention of attacking.

The admission "provides them (with) 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, a Brookings Institution Scholar, said the North Korean admission may 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," said Steinberg. "The bigger problem is ... making it harder to find a formula to get through this without them having to do very visible things that involve ... dismantling what they have."