* Test-launch by North of medium-range missile expected
* Pyongyang blames South Korea for closure of business zone
* G8 issues strong condemnation of North (Adds comment by G8 ministers, edits)
South Korea and the United States were on high alert for a North Korean missile test-launch on Thursday, as the isolated state celebrated the rule of the Kim dynasty and appeared to tone down rhetoric of impending war.
Despite recent threats to attack U.S. bases and the South, North Korea started to welcome a stream of visitors for Monday's celebrations marking the birthday of its founder Kim Il-sung.
North Korea has stationed as many as five medium-range missiles on its east coast, according to defence assessments by Washington and Seoul, possibly in readiness for a test-launch that would demonstrate its ability to hit U.S. bases on Guam.
"There are signs the North could fire off Musudan missiles any time soon," an unnamed intelligence source in Seoul told Yonhap news agency.
Most observers say Pyongyang has no intention of starting a war that would be likely to bring its own destruction but warn of the risks of miscalculation on the highly-militarised Korean peninsula.
There were few signs of alarm in Seoul, the South Korean capital, and financial markets shrugged off the risk of conflict with stocks posting a third day of gains.
New South Korean President Park Geun-hye met foreign businessmen on Thursday and reassured them the country was safe and was working closely with the United States and China, the North's only major diplomatic ally.
Taiwan became the first country to warn its citizens against travelling to South Korea after Pyongyang said foreigners should leave, but Seoul hotels reported brisk business.
G8 CONDEMNS NORTH
The G8 group of rich countries condemned "in the strongest possible terms" North Korea's development of nuclear weapons and ballistic missile technology on Thursday.
Meeting in London, foreign ministers from the United States, Britain, France, Germany, Italy, Japan, Canada and Russia urged the Stalinist state to "refrain from further provocative acts".
"They condemned DPRK's (North Korea's) current aggressive rhetoric and confirmed that this will only serve to further isolate the DPRK," a communique said.
Pyongyang issued a statement on the closure of the joint North-South Kaesong industrial zone, closed when it ordered its workers out this week, terming the venture "the pinnacle of General Kim Jong-il's limitless love for his people and brothers".
The statement on the country's KCNA news agency blamed Park for bringing the money-spinning venture to "the brink of shutting down".
Kim Il-sung died in 1994 and his son Kim Jong-il ruled North Korea until his death in December 2011. He was succeeded by Kim Jong-un, the third of his line to preside over one of the world's poorest and most heavily militarised countries.
Since taking office, the 30-year-old has staged two long- range rocket launches and a nuclear weapons test. The nuclear test in February triggered U.N. sanctions that Pyongyang has termed a hostile act and a precursor to invasion.
For over a month, Pyongyang has issued almost daily threats to the United States and South Korea, recently warning foreigners to leave the South to escape "thermonuclear war".
But such rhetoric appeared on Thursday to abate as KCNA listed arrivals for the birthday celebrations, ranging from Chinese businessmen to Cold War-era enthusiasts of its socialist monarchy and ideology of "juche", or self-reliance.
"YEAR OF TEARS"
The Kim regime may have been given a boost by a rise in food production thanks to agricultural reforms, a Korean-language Japanese newspaper with close links to Pyongyang reported on Thursday, saying there had been a bigger harvest in 2012.
There have been reports of starvation in North Korea last year and the country experienced a famine in the 1990s. Although the newspaper report could not be independently verified, it chimed with a World Food Programme assessment.
Party newspaper Rodong Sinmun said Kim Jong-un had "lifted the North Korean people out of the sea of bloody tears that has been their world in the past year" after his father's death.
It was the first anniversary on Thursday of Kim Jong-un's official ascent to power, although he became de-facto leader immediately after his father's death.
Despite the tension, Pyongyang does not appear to have placed its 1.2 million-strong armed forces on high alert.
The North's rhetoric has pushed the United States, the guarantor of South Korea's security, to move more military assets into the region in response to the rising threat levels.
U.S. Defense Secretary Chuck Hagel warned on Wednesday the North was "skating very close to a dangerous line", and said the United States, currently in military exercises with South Korea, was prepared to respond to any moves by Pyongyang.
"We have every capacity to deal with any action that North Korea would take, to protect this country and the interests of this country and our allies," Hagel said.
CHINA REBUKES NORTH
Secretary of State John Kerry visits Seoul on Friday on a trip that will also take him to Beijing. He met Russian Foreign Minister Sergei Lavrov in London and the Russian stressed Moscow and Washington were closely aligned.
China urged "relevant parties" to resume long-stalled talks joining China, the two Koreas, the United States, Japan and Russia, aimed at reining in Pyongyang's nuclear ambitions.
The Global Times, published by the Chinese Communist Party's People's Daily, said North Korea had a duty to preserve peace.
"Pyongyang should drop its illusions that it can make the world stay silent over its desire for nuclear arms through its hard-line stance and deceptions," it said.
Financial markets have fluctuated with the tensions but appear to have stabilised and the head of South Korea's central bank on Thursday announced there was no imminent threat to Asia's fourth-largest economy.
"We will take appropriate action if the economy is affected by North Korea risks," Bank of Korea Governor Kim Choong-soo said after it left interest rates unchanged on Thursday.