The United States and South Korea say they have agreed to a timetable for removing frontline American forces from the South's border with communist North Korea in a bid to boost security.
They also confirmed a US plan to invest $11 billion in new capabilities in South Korea, including upgraded missile systems and reinforced military intelligence.
North Korea has thousands of loaded artillery pieces aimed at Seoul and half of its army is deployed within 40 miles of the DMZ dividing the peninsula, the world's most heavily fortified border.
The two-phase, multi-year pullback of ground troops from near the Demilitarised Zone (DMZ) was agreed after two days of bilateral talks in Seoul.
The plan had caused anxiety in South Korea because it was unveiled in the middle of a crisis over the North's nuclear programme that has escalated since late last year.
Addressing those concerns, a joint statement issued by the two countries said: "Both sides agreed that a fundamental goal is to enhance security on the Korean peninsula and improve the combined defence."
The consolidation of forces around several hubs in South Korea would be made "taking careful account of the political, economic and security situation on the peninsula and in Northeast Asia", it said.
US officials reiterated remarks by U.S. Deputy Defence Secretary Paul Wolfowitz in Seoul on Monday that changes to the frontline 2nd Infantry Division would enhance military readiness, not diminish it, the statement said.
The 2nd Infantry Division accounts for 14,000 of the 37,000 US troops in South Korea, which has viewed the forces as a tripwire guaranteeing American involvement in any conflict triggered by an invasion by North Korea.
South Korean officials had voiced concern that a shift of the troops away from the frontier could be perceived by North Korea as a weakening of US support for Seoul or as a move to clear the way for a pre-emptive attack on the North.
Thursday's statement said the frontline troops first would be consolidated at several bases near the border. In a second phase, the division would be moved south of the Han River which bisects the capital Seoul. Land procurement would begin next year.
The main US Army headquarters would be moved from its current location in prime real estate in central Seoul "at an early date", the statement said.
The two allies would hold another round of consultations on the base plan in July and also hold defence ministerial talks soon in Washington, it said.
The United States has branded North Korea part of an "axis of evil" along with pre-war Iraq and Iran. For its part, North Korea has accused the United States of using the nuclear standoff as an excuse for an eventual attack.
The two Koreas remain technically at war, because their 1950-53 conflict ended in an armed truce that has never been replaced by a peace treaty.