Just a short walk from Cold War monuments Checkpoint Charlie and the Brandenburg Gate, backpackers may soon be able to check in to a hostel in an unlikely spot: the compound of the North Korean Embassy.

Just don't expect your pillows to be fluffed by the "Dear Leader," Kim Jong Il.

After Japan's daily Yomiuri newspaper reported the hostel story on its Web site Thursday with a headline saying: "Cash-strapped N. Korea to open hotel in Berlin," the North Korean Embassy denied any plans for a hostel on its property. Instead, it blamed the Japanese for spreading "enemy propaganda."

"The rumors about this hostel are based on Japanese media reports, but they are not correct," said an embassy spokesman who would only talk on condition of anonymity. "As you know, the Japanese media are very much influenced by their government and they probably gave out this wrong information because they are our enemies."

There are two buildings on the embassy site, separated by a fence. One houses the embassy, complete with a display case holding pictures of Kim, the North Korean leader. The other houses a center for psychotherapy and offices of the Federal Association for German Psychologists.

The North Korean Embassy spokesman did confirm that one of the buildings had been rented out for more than a decade.

And despite the official denials, there are signs a hostel is going onto the grounds as well.

An office worker at the site said local businessman Yilmaz Celik had recently rented the ground floor and third floor of the four-story building from the North Koreans to use as a backpacker's hostel.

Celik would not comment, but a Web site for the project, "City Hostel Berlin," said a deal was signed with the North Koreans in December and that construction on the premises had started in January.

Construction workers inside the building were busily turning office space into baths, kitchens and bedrooms. A check-in counter had been installed in the lobby and a sign above the entrance of the housing block, in the former East Berlin, said in big yellow letters "City Hostel Berlin."

Berlin planning official Ephraim Gothe said that, while the city had received an application for turning parts of the embassy into a hostel, the go-ahead to begin work has not yet been granted.

"We have not given permission for the start of the reconstruction," he said, adding that the matter would have to be looked into further.