SEOUL, Aug 22 (Reuters) - Top aides to the leaders of North and South Korea met at the Panmunjom truce village straddling their border on Saturday, raising hopes for an end to a standoff that put the rivals on the brink of armed conflict.

The meeting at the Demilitarised Zone (DMZ) village, known for its sky-blue huts and grim-faced soldiers, was set for half an hour after North Korea's previously set ultimatum demanding that the South halt its loudspeaker propaganda broadcasts along the border or face military action.

That deadline passed without any reported incidents.

Tension on the Korean peninsula has been running high since an exchange of artillery fire on Thursday, prompting calls for calm from the United Nations, the United States and the North's lone major ally, China. South Korea's military remained on high alert despite the announced talks, a defence official said.

South Korean President Park Geun-hye's national security adviser and her unification minister met Hwang Pyong So, the top military aide to the North's leader Kim Jong Un, and a senior official who handles inter-Korean affairs at 6 p.m. Seoul time (0900 GMT).

"The South and the North agreed to hold contact related to the ongoing situation in South-North relations," Kim Kyou-hyun, the presidential Blue House's deputy national security adviser, said in a televised briefing.

Pyongyang made an initial proposal on Friday for a meeting, and Seoul made a revised proposal on Saturday seeking Hwang's attendance, Kim said.

The North's KCNA news agency also announced the meeting, referring to the South as the Republic of Korea, a rare formal recognition of its rival state, in sharp contrast to the bellicose rhetoric in recent days.

"They need to come up with some sort of an agreement where both sides have saved face. That would be the trick," said James Kim, a research fellow at the Asan Institute for Policy Studies in Seoul.

"North Korea will probably demand that the broadcasts be cut, and they may even come to an impasse on that issue."

North Korea, technically still at war with the South after their 1950-53 conflict ended in a truce, not a peace treaty, had

declared a "quasi-state of war" in front-line areas and set the deadline for Seoul to halt the broadcasts from loudspeakers placed along the border.

"The situation on the Korean peninsula is now inching close to the brink of a war due to the reckless provocations made by the south Korean military war hawks," the North's KCNA news agency said earlier.

Seoul had said it would continue the broadcasts unless the North accepted responsibility for landmine explosions this month in the DMZ that wounded two South Korean soldiers. Pyongyang denies it planted the mines.

South Korean Vice Defence Minister Baek Seung-joo said on Friday his government expected North Korea to fire at some of the 11 sites where Seoul has set up loudspeakers.

The United States, which has 28,500 military personnel based in South Korea, said on Friday it had resumed its annual joint military exercises there after a temporary halt to coordinate with Seoul over the shelling from North Korea.

The drills, code-named Ulchi Freedom Guardian, began on Monday and run until next Friday. North Korea regularly condemns the manoeuvres as a preparation for war.

Four South Korean and four U.S. fighter jets flew in a joint sortie over the South on Saturday, an official at the South's office of the Joint Chiefs of Staff said by telephone, as thousands of South Korean villagers living near the border were evacuated into shelters.

FAMILIAR FACES

Pyongyang's two negotiators were among a delegation that made an unexpected visit to the South last October to attend the closing ceremony of the Asian Games in Incheon, where they met Kim Kwan-jin, Park's national security adviser, who lead the South's delegation on Saturday.

That visit had raised hopes for an improvement in inter-Korean relations, but little progress was made.

North and South Korea have often exchanged threats over the years, and dozens of soldiers have been killed in clashes, yet the two sides have always pulled back from all-out war. Analysts had expected the current crisis eventually to wind down.

"The fact that these powerful officials who represent South and North Korea's leaders are meeting means this is a great time to turn the crisis into opportunity," Yang Moo-jin, a professor at the University of North Korean Studies in Seoul. "It is a breakthrough."

North-South ties have been virtually frozen since the deadly 2010 sinking of a South Korean warship. North Korea denies it was involved.

South Korea began blasting anti-North propaganda over the DMZ on Aug. 10, resuming a tactic both sides had stopped in 2004, days after the landmine incident.

North Korea resumed its own broadcasts on Monday. On Thursday, according to Seoul, it launched four shells into South Korea. The South fired 29 artillery rounds back.

Neither side reported casualties or damage.

North Korea has been hit with UN and U.S. sanctions because of nuclear and missile tests, moves that Pyongyang sees as an attack on its sovereign right to defend itself.