SEOUL, South Korea (AP) — South Korea's president urged North Korea to abandon military provocations and make a "courageous change" toward peace, using a speech Sunday marking the Korean peninsula's liberation from Japanese rule to outline a path for its eventual reunification.

North Korea didn't immediately respond to the proposal but issued a warning that its military would be "merciless" in its retaliation against joint military exercises planned this week by South Korea and the United States.

President Lee Myung-bak made the offer as relations between the two Koreas are at their lowest point in years following the March sinking of a South Korean warship that an international investigation blamed on North Korea. Forty-six sailors were killed. North Korea denies attacking the ship.

"The North must never venture to carry out another provocation, nor will we tolerate it if they do so again," Lee said in a nationally televised speech.

Lee — marking the 65th anniversary of Korea's liberation from Japanese rule at the end of World War II in 1945 — called the ship's sinking an "unprovoked attack" by North Korea and demanded Pyongyang heed calls to improve ties with Seoul.

He also said South Korea should prepare for unification with North Korea by studying measures including the adoption of a unification tax aimed at raising money for the costs of integration.

Dressed in traditional Korean clothes, Lee spoke after officials unveiled the restored main gate of the former royal palace. The Gwanghwamun gate symbolizes Korea's turbulent modern history, as it was once torn down and rebuilt at a different site to make room for the Japanese governor's building during the colonial period before it was destroyed again during the 1950-53 Korean War and rebuilt in 1968.

Lee said North Korea must face reality and make a "courageous change." He proposed a three-stage unification process in which the two Koreas would first form a "peace community" involving denuclearization of the peninsula, then an "economic community" for cross-border economic integration, and eventually a "community of the Korean nation" with no institutional barriers between them.

"Through this process, we can ultimately bring about the peaceful unification of Korea," Lee said.

The Korean peninsula was divided after the end of Japanese rule and officially remains in a state of conflict because the Korean War ended with an armistice, not a peace treaty. The U.S. stations about 28,500 troops in South Korea to deter aggression from the North.

On Friday, President Barack Obama issued a statement congratulating South Korea on the celebration of its Liberation Day and reaffirmed Washington's security commitment.

"Our alliance was as necessary then as it is now," Obama said. "Our commitment to the security and defense of the Republic of Korea will never waver."

On Monday, South Korea and the U.S. plan to start joint annual military drills that North Korea has called an invasion rehearsal, though the two allies have repeatedly said they have no intention of attacking the North.

North Korea "will deal (a) merciless counterblow to the U.S. imperialists and the Lee Myung-bak group of traitors," the North's military said in a statement Sunday carried by the official Korean Central News Agency. It said the action would be a severe punishment that "no one has ever met in the world."

On Japan, Lee said that Seoul and Tokyo should never forget history but should work together to develop a new future.

Last week, Japanese Prime Minister Naoto Kan offered a renewed apology for the suffering caused by the colonization. The apology was issued ahead of the 100th anniversary of Japan's annexation of the Korean peninsula on Aug. 29, 1910.

"I have taken note of Japan's effort, which represents one step forward," Lee said of Kan's apology.

"However, there still remain issues that have to be resolved," he said. "The two countries are called upon to take concrete measures to forge a new relationship for another 100 years."

Many older Koreans still harbor strong resentment against Japan over the colonization. Hundreds of thousands of Koreans were forced to fight as front-line soldiers, work in slave-labor conditions or serve as prostitutes in brothels operated by the military.

Later Sunday, about 50 female activists rallied near the Japanese Embassy, demanding Tokyo offer compensation to former sex slaves and other victims of its colonial rule.