The 220-kilometer-long Gyeongwon Line, completed in 1914, was mainly used to transport goods from Seoul's Yongsan Station to Wonsan City, now in North Korea.
Since the rail line was severed in 1945 and partially destroyed during the Korean War, the two Koreas have been operating the disconnected branches on their respective sides of the border.
In 2012, South Korea restored a five-and-a-half-kilometer section connecting its northernmost Sintan-ri Station to Baengmagoji Station.
On Wednesday, the South broke ground on a project to restore the section from Baengmagoji to Woljeong-ri, the line's northernmost station in the South, closest to the Military Demarcation Line.
South Korea then plans to complete work on the rest of the line, stretching to Pyonggang Station, after an agreement with the North is reached.
At the ceremony, President Park Geun-hye highlighted the significance of breaking ground on this part of the project ahead of this year's 70th anniversary of the division of the two Koreas.
"Re-connecting the Gyeongwon Line will be the starting point of healing our wounds from the division and moving towards unification and a hopeful future."
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Calling on North Korea to choose the path towards peace and prosperity, she expressed the hope the restored railway will contribute to the success of her so-called "Eurasia Initiative," linking logistics and energy infrastructure across the two continents.
"If the two Koreas start cooperating with each other and countries in Eurasia begin to increase exchanges, we can expect the restoration of stability and peace in Northeast Asia. We can also expect to transform Eurasia into the land of creativity and peace."
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As the rail line also crosses the Demilitarized Zone, or DMZ, President Park suggested the two Koreas work together to develop the area into an eco-friendly peace park under the new name Dream Making Zone.
Choi You-sun, Arirang News.