UPDATE 5-Japan PM sees progress on islands after Medvedev talks

(Releads with Japan seeing positive signs on islands)

By Teruaki Ueno and Denis Dyomkin

MEIENDORF CASTLE, Russia, April 26 (Reuters) - Japanese Prime Minister Yasuo Fukuda said on Saturday he believed progress towards resolving a decades-old dispute over a group of Pacific islands was possible.

"With respect to the territorial issue, I believe we will be able to secure a positive direction," Fukuda said after talks with Russia's President-elect Dmitry Medvedev.

But Russian officials said the issue had not been discussed in depth and analysts were sceptical of any sort of breakthrough under President Vladimir Putin or Medvedev.

The row over the sparsely populated islands, known as the Northern Territories in Japan and Southern Kuriles in Russia, has prevented Moscow and Tokyo from signing a peace treaty more than 60 years after the end of World War Two.

"We are continuing dialogue on the peace treaty and will create the necessary conditions for advancement along this path," Putin said before the talks. "There still exist many unresolved problems" in relations, he said, without elaborating.

Fukuda's talks with Medvedev at the Meiendorf Castle outside Moscow also focused on the agenda for the Group of Eight summit which Japan hosts this year.

Medvedev, who will be sworn in as president on May 7, said he wanted to discuss "above all the G8 summit" on Japan's northern island of Hokkaido.